Written evidence submitted by So Energy (WIN0030)
About So Energy
So Energy supplies over 300,000 households across Britain and in August 2021 we merged with ESB Energy, the UK supply arm of the Irish utility company ESB Group, and now operate a combined business under the So Energy brand.
So Energy was founded in 2015 and has been consistently recognised for outstanding customer service, having been a 2020 Which? Recommended Provider and topped the Citizens Advice supplier rankings more than any other supplier since it started comparing the market in 2017. ESB is Ireland’s largest energy company with 90 years of experience in electricity generation, transmission, distribution and supply who have invested over £2billion in Britain’s energy infrastructure over the past three decades. In the UK ESB is constructing 450MW of offshore wind with joint venture partners and has a further 2GW of onshore and offshore wind in the pipeline. They also operate electric vehicle charging networks across London, Coventry and Birmingham.
Following the recent round of energy supplier failures in 2021 and 2022, So Energy is one of the last challenger suppliers left in the market, but one that is backed by ESB’s resources and expertise, which we believe gives us a unique perspective on the market.
First of all, we wanted to thank the Committee for inviting us to their first stakeholder event and also to give oral evidence on this inquiry on Wednesday 6th September. Should any Committee Member wish to reach out to us about the contents of this response in advance of the oral evidence session then please do.
This inquiry is extremely timely, and with winter on the horizon it is crucial that you can make recommendations to the Government as soon as possible. We have answered your individual questions below, but first have included an executive summary of our view.
Despite the price cap level being announced at £1,923 on 25th August, and the high level welcome news that the level is decreasing, the view that things are getting better for households is not a reflection of the reality. At £1,923 this level is still almost double than before the crisis began and actually more than households were paying last winter when factoring into account the government support that was previously available. With both the Energy Price Guarantee (EPG) capping bills at £2,500 a year and the six-month £400 Energy Bill Support Scheme (EBSS) - which spread across the year would result in households paying direct debits equivalent to £1,700.
Even at last winter’s rate, we saw first-hand households struggling to pay these bills and the increased rates having a serious impact on their day-to-day lives. Indeed, we saw customer debt rise significantly. This is all the more worrying when you consider that last winter, we saw an unseasonably warm winter, which kept usage lower than normal. Should we see an unexpectedly cold winter bills could easily rise hundreds of pounds more for an average household.
Without further intervention from the Government, we will see a huge proportion of households in ‘fuel poverty’ - normally measured as when a household spends more than 10% of their income on energy costs. Previously, National Energy Action estimated up to 8.4 million people will be in fuel poverty, up from 4.5 million pre-crisis.
Future bill support should be more targeted at those who need it the most. Rather than being universal – helping people to heat private pools and homes alike – it should be focused on those in ‘fuel poverty’. As the Public Accounts Committee noted, it is estimated the total cost of the EPG and EBSS will be £69 billion – roughly the same cost as furlough. It would be unfair on the taxpayer to expect this level of intervention to continue, which is why Government needs to better target those in need.
As the Public Accounts Committee also noted, urgent action needs to be undertaken now by various departments to ensure we can identify those in need. Better data matching is needed; suppliers have usage information, HMRC has income data and suppliers are already working closely with DWP to provide Warm Home Discount credits in an efficient manner. Putting in place mechanisms to identify those in ‘fuel poverty’ and ensuring future bill support is allocated to these households is critical. Greater data matching not only helps the most vulnerable but creates a better deal for the taxpayer. Otherwise, the Government risks once again sleepwalking into a situation whereby they announce last-minute and extremely costly interventions.
Such a mechanism to identify and target those most in need would also have benefits far beyond this purpose – it could help interventions in other sectors and would support the Government’s work towards exploring a social tariff for energy costs. So Energy would support the introduction of a permanent safety net for those in ‘fuel poverty’, replacing the costly and unwieldy price cap which has actually contributed to bills being higher.
We would direct the Committee to the EnergyUK response to this inquiry on this specific question, specifically in regard to Grid balancing costs and measures to preserve system margins over the winter.
The current regulatory environment in the retail market is unfit for purpose. Far from shielding households from higher bills, the price cap has actually contributed to these price shocks. Whilst the price cap was not the reason for wholesale prices rising – which was due to global shortages of gas and significantly heightened with the invasion of Ukraine – it has acted as a straitjacket and has resulted in numerous unintended consequences which have been incredibly costly.
Firstly, the price cap has created an additional risk for suppliers in needing to hedge in line with the Ofgem defined methodology for both ‘variable tariff’ customers and ‘fixed tariff’ customers. As a result of the rising energy prices, the fixed tariff market ceased to exist and all customers coming to the end of a fixed tariff defaulted on the Ofgem price cap level. Suppliers were not able to hedge with the benefit of hindsight and ultimately forced to buy energy at prevailing rates according to a price which had been set at lower levels. This issue was defined by Ofgem as ‘Unexpected Standard Variable Tariff Demand’ and an extra allowance was introduced in mid-2022 which added around £50 to customer bills.
It was this very issue that contributed to many suppliers exiting the market. Whilst there were some suppliers operating weak hedging strategies, the issue of Unexpected Standard Variable Tariff Demand disproportionately impacted newer suppliers who tended to have a much higher customer base on fixed tariffs. As the number of customers on price capped rates increased from 12 million to 25 million, there were also prudently operated energy suppliers who were not able to stand the losses associated with buying the energy at record highs for these customers. When suppliers exit the market, it passes costs onto households in the future. Indeed, the National Audit Office believe that falling suppliers has cost the taxpayer £2.7 billion. This has added a further around £100 to household bills since the crisis began.
The issue does not go away now the crisis has receded. In recent months, So Energy has been one of the only suppliers to offer fixed tariffs to customers at a level below the price cap. However, when pricing up our fixed tariffs we now add an extra price cap risk premium that when the customer rolls off their tariff in 12 months we will be in a similar position where that customer is able to default on to a price cap tariff in a way in which we could not reasonably forecast. By having the price cap in place, we are building any additional risk and cost for fixed tariff customers too and this is a situation which would not exist in a world without the price cap.
A less commonly discussed impact of the price cap has been the way in which almost all customers were pushed onto price cap rates. So Energy received negative media attention in early 2022 for offering customers 1 and 2 year fixed tariff deals which were around £2k/annum. At the time, our teams were described as ‘pressuring’ customers into deals which were higher than the price cap. At the time we offered these deals they were more expensive than the price cap but below future price cap levels. We stopped offering these tariffs as a result of the negative media attention. Had all 30m homes in the UK taken these 12-month deals, the Government would never had needed to spend £27billion on the Energy Price Guarantee scheme and customers would have saved a further £4bn on top of this. The price cap therefore constrained suppliers because it required a certain price level which becomes the perceived ‘right price’ even though this may not be reflective of the reality.
With the exponential increase in wholesale prices and volatility, there has been a non-linear increase in costs for energy suppliers associated with managing wholesale risk and debt. Despite being an incredibly complex methodology to calculate the price cap level, it has not adequately adjusted to the entirely different market environment that now exists. The ultimate issue at stake here is that investors do not see the UK energy retail market as worthy of investment. The whole market has an underling negative profit margin, which is one of the reasons Shell is now voluntarily exiting the market; energy profits have come from energy generation, not retail. By allowing the suppliers to raise our own revenue, we can invest in innovations to deliver net zero, whereas now due to the low profit margins, we are relying on taxpayer money to do this. For decades the UK has been the leader in energy; throughout the sector and across retail, competition, innovation, wholesale markets and regulation. There should be no illusion that our Net Zero and economic ambitions as a nation will suffer if we do not address an energy retail market in its current catatonic state.
To ensure a competitive and flexible market in the future, that can support households through price shocks, we need to replace the price cap with a mechanism that is focused on those who are most vulnerable. By dramatically improving data matching across government and suppliers, better targeted support can be delivered to the customers that needed it the most. Removing the price shock from being passed to consumer bills as result of the exponential increase in energy wholesale prices is an unrealistic aim. In this regard, the Committee’s question would be better reframed from “What more could have been done to prevent price shocks being passed to consumer bills?” to “What more could have been done to prevent price shocks being passed to vulnerable household bills?”. To do this would require hugely improved data matching capabilities, and also funding. This funding can either come from a levy on energy bills for all customers or through general taxation. This is the critical question that government needs to answer if we are serious about properly addressing fuel poverty.
We believe strongly in the importance of caring and supporting our customers when these price shocks occur. That is why we have expanded our customer care team by 40% and have strengthened our relationships with debt and money advice charities so we can give constructive advice to customers.
We have been flexible throughout the crisis and on a case-by-case basis have created bespoke payment deals with customers so that they can pay back their bills in a more manageable and spread-out way.
For So Energy, there has been a significant increase in operational cost to support customers and we have also experienced a massive increase in customers debt in percentage terms. Under the price cap, neither the allowance for operating cost or debt have been amended under to reflect this reality and therefore there is a clear commercial challenge we face. Increasing support for customers or allowing customers to further build up debt could push us into an unprofitable position further; the energy retail market has been unprofitable for the last 5 years.
With the energy retail profit margin at 2p in the £1, it’s clear that when customers are not able to pay their energy bill then there become much wider impacts. Just one customer cancelling their direct debit and moving to a ‘not paying’ position requires another 50 customers for the energy supplier to remain financially even. The cost of customer debt is shared across the industry, and this quickly becomes a serious societal problem. The key underlying issue to solve is to remove fuel poverty from society. A permanent safety net in the form of targeted support would significantly reduce the risk that vulnerable households are in positions where they can’t pay their bills.
Since early 2023, suppliers have agreed a stronger code of practice for forcibly moving customers to prepayment meters. Whilst this is not a practice So Energy has undertaken, suppliers do need adequate recourse for customers who wilfully ignore any supplier engagement to pay their bill. The burden is ultimately socialised and without there being meaningful methods to collect energy debt, there is a genuine risk that incentives start to skew against fairly paying energy bills.
The short answer is no; Ofgem are too preoccupied – to date – with treating the symptoms and not the causes, adding further sticker plaster regulations rather than genuine to reform to ensure the crisis does not happen again at this scale.
At a time when bills are at a record high, Ofgem is neglecting to carry out proper impact assessments on the rules they are introducing. For example, they are asking for out of hours facilities for customers off supply (not on the grid) but the number is estimated to be extremely low, meaning it will be extremely costly for suppliers, and disproportionately costly for smaller suppliers. Ofgem are also making it more difficult for suppliers to estimate the costs and introduce fixed tariffs. So Energy was the first supplier to introduce a fixed tariff for new customers, but with the huge uncertainty about future policy costs, additional risk premium needs to be included when pricing fixed tariffs to account for the risk that these costs turn out higher than expected.
On the price cap, Ofgem is following a ‘one size fits all’ approach which is damaging competition in the market which is returning us to a market dominated by larger, traditional suppliers. For example, as a supplier, if you lose money due to factors out of your control, there is a strong possibility you will have to absorb these costs if you are a smaller supplier, because allowances built into the price cap are calculated on a weighted average.
As proven in the current crisis, the price cap model does not work in volatile markets, despite its purpose being to shield households from high costs. If there was no price cap during the crisis, then a lot more people could have fixed their tariff and avoided the worst of the crisis – but by making fixed tariffs difficult to implement, the price cap reduced consumer choice.
Ofgem should work with Government to ensure a more innovative and responsive energy retail market that supports households and protects them. Replacing the price cap with a permanent safety net – such as a social tariff which would be a bespoke payment to those in ‘fuel poverty’ depending on need – would help to resolve this issue.
The Government has recently opened a call for evidence on ensuring the retail market is innovative – an acknowledgement that more could be done. We agree with the need for a competitive, innovative market, but as set out above current regulation is not delivering this.
We are therefore encouraged by Government’s willingness to look and rectify this issue, and we look forward to responding to the call for evidence. We also urge the Committee to contribute and work with Government to support policy formulation.
So Energy – as a challenger supplier – supports a more competitive market, not one dominated by the traditional suppliers which in the past has kept costs high for households. To achieve this, we support:
A) Removing the price cap.
B) Introducing a permanent safety net through targeted support (this could take the form of a ‘social tariff’ or an expanded Warm Homes Discount).
C) Removing the loyalty penalty by permanently banning acquisition-only tariffs, which result in the best deals only being offered to new customers through switching websites.
D) Until the point of the cap being removed, increase the EBIT margin to create an investable, and innovative market whereby suppliers can invest – rather than relying on Government – in net zero products.
The Energy Prices Act (2022) is the most up to date legislation affecting the price cap, keeping the cap in place indefinitely but giving the relevant Secretary of State the power to unilaterally remove the cap. We support the powers given to the Government to take action, but we are also concerned about the sweeping powers this Act has given the Minister to take action without needing to consult industry.