Written evidence submitted by British Gas (EPW0005)

 

 

 

Executive Summary

 

  1. Energy price comparison websites play an important role in helping consumers to engage in the energy market, and act as trusted intermediaries to switch suppliers. According to 2014 research by Ofgem, 40% of all switches across the industry are prompted by comparison sites, which compares to just over 20% in 2011.

 

  1. Given the valuable role these websites can play, it is important that we ensure they continue to work in the consumer interest and allow households to make fully informed choices about the best energy tariff for them. In this context, we are pleased that the Select Committee is conducting an inquiry into these issues.

 

  1. British Gas started to enter contracts with price comparison websites in 2005 and now has commercial relationships with most of the switching sites, including uSwitch, MoneySavingExpert and MoneySupermarket. Whilst we remain very supportive of the role price comparison websites play, in order to ensure this channel operates in the best interests of consumers, we would recommend changes to the market in the following key areas:

 

Commission transparency

 

  1. To help consumers make informed decisions, we recommend that comparison sites should provide more information about their relationship with suppliers, including which suppliers they have a contract with and where there is a commission arrangement. This could be achieved by prominent alerts on price comparison sites to tell customers that sites will receive a fee when they switch. Customers may also find it helpful to see more information about how the commission model with suppliers works.

 

A comprehensive picture of the market

 

  1. Currently, some comparison sites give consumers the option to display a whole market view when they enter their search criteria. However, in the majority of cases, the default option is to show deals that customers can “switch to today” (tariffs from those suppliers that the site has a commercial relationship with). Recent research by the collective switching service, Big Deal, showed that over a thirteen week period all the major price comparison websites did not show the cheapest deal from customers at least once.[1]

 

  1. In order to ensure that the switching service is independent, and to allow customers to make a fully informed decision, we believe that the default option should be to provide consumers with a whole market view.

 

Comparison site selection criteria

 

  1. Comparison sites display tariffs based on customers’ actual or estimated annual consumption and order tariffs on a cost basis, with the cheapest tariff displayed first.   However, this process does not always take into account additional criteria important to consumers. 

 

  1. Tariffs or suppliers that provide government or supplier schemes, such as the Warm Home Discount, may not make the best deal tables, despite the fact that this could provide customers with an additional £140. In addition, suppliers that provide innovative products, such as smart meters, or tariffs bundled with devices, such as remote heating controls, which help customers’ reduce their bills, may also be lower down the list of cheapest deals.

 

  1. We suggest that price comparison sites should look for ways to communicate all beneficial features to consumers.

 

Innovative tariffs

 

  1. The roll-out of smart meters enables suppliers to offer more sophisticated tariffs, such as time of use tariffs. These tariffs allow customers to respond to price incentives and change their consumption behaviour to reduce their energy bills and reduce pressure on the grid at peak times. 

 

  1. British Gas has started to trial time of use tariffs and, as one example, 2,500 customers are currently on our ‘free Saturdays or Sundays’ tariff, which we have been trialling since June 2014. Customer feedback has shown that the tariff has been extremely popular, with a Net Promoter Score (a standard method for measuring customer satisfaction) of +39.

 

  1. However, because time of use tariffs are predicated on consumer behaviour and it is therefore difficult to accurately project the cost of the tariff, price comparison websites currently struggle to understand how to show these tariffs.

 

  1. If suppliers remain unable to promote these tariffs on price comparison websites, there is a risk that consumers may not fully benefit from innovation in the sector and may miss out on new ways to control and reduce their energy usage.

 

  1. We are pleased that some price comparison websites are already taking steps to look at how time of use tariffs can be displayed, but we would urge DECC, Ofgem, and the industry to work together to look at this issue in more detail.

 

Ofgem’s Confidence Code

 

  1. We welcome Ofgem’s steps to develop the Confidence Code for price comparison websites and we believe the principles that underpin the Code – independence, reliability, accuracy and transparency – should help to further enhance consumer confidence. However, we do not believe that the Code currently provides the necessary protection for consumers.

 

  1. Given that switching sites are now involved in 40% of sales in the energy sector, we believe the regulatory framework should be strengthened. The Confidence Code should be made mandatory for all price comparison websites, rather than voluntary. Governance of the code, including sanctions and enforcement action, should also be put on a much stronger regulatory footing.

 

Key issues


Section 1: The role of energy price comparison websites and how they operate

 

  1. Energy price comparison sites are commercial entities, which offer a switching service, which is free to use for consumers. We believe they have the potential to play a valuable and important role in the energy market.

 

  1. Switching sites work on a commission based model and have contractual relationships with certain suppliers (large and small), including British Gas.

 

How do price comparison sites operate?
 

  1. Comparison sites are primarily a web-based service. Ofgem have also identified face-to-face services as an area for their consideration. Whilst we support work to ensure that vulnerable or more hard-to-reach groups can benefit from price comparison services, we believe that trusted third party organisations, such as Citizens Advice, are best placed to provide consumers with information about their tariff options - their experience of running the Energy Best Deal Campaign would make them well-placed to take on this role.

 

  1. We would have significant concerns if commercial entities, such as switching sites (which are not directly regulated) were to provide face-to-face services, as this may lead to issues that could erode trust.

 

  1. Switching sites display tariffs based on customers’ actual or estimated annual consumption and order tariffs on a cost basis, with the cheapest tariff displayed first. However, this process does not always take into account other areas of importance for customers.

 

  1. For example, tariffs of suppliers that are eligible for government or supplier support, such as the Warm Home Discount, may not be displayed as one of the best deal tariffs, despite the fact that this could provide customers with an additional £140. Furthermore, a customer may switch away from a supplier, thinking they will save money on their energy costs, without realising that if they move to certain suppliers, in particular small suppliers, they will no longer be eligible for the £140 Warm Home Discount payment. They may also find they are no longer able to receive assistance under the Energy Company Obligation, without making a financial contribution.

 

  1. In addition, suppliers that provide innovative products, such as smart meters, which help customers’ reduce their bills, may also be lower down the list of best deals.

 

  1. We are pleased that some switching sites have started to take criteria, such as customer service, into their selection process. However, we need to ensure that the methodology for measuring areas such as customer service are clear, well-evidenced and consistent across all price comparison websites, so consumers are reassured that it is not influenced by any commission arrangements a comparison site has with any one supplier.

 

  1. In order to ensure that consumers are seeing the most innovative and sophisticated tariffs, we would also like to see industry, DECC and Ofgem work together to look at how price comparison websites can include time of use tariffs in their search results. There are currently regulatory and operational challenges which make this difficult, but we are pleased that certain sites have started to look into this issue. As the smart meter roll-out progresses, it will become more and more important that these tariffs are displayed, so consumers can see the full benefits of smart.

 

Oversight

 

  1. Price comparison websites sit outside the direct regulation of Ofgem, but there is a voluntary Confidence Code which a number of sites are accredited under. Ofgem is currently reviewing the Confidence Code for domestic switching sites, as well as looking at how commission transparency works for third party intermediaries in the non-domestic sector. However, as outlined in section three, we believe more can be done to strengthen the Code, including making it mandatory for comparison sites.

 

Section 2: Transparency of commission received for different energy plans

 

  1. In recent months there has been increased political and media scrutiny around the transparency of the commission and fees that price comparison sites receive and how this impacts on their promise to deliver an independent service. To ensure trust is maintained in these sites and to prevent any consumer harm, we believe that changes could be made in this area.
     
  2. Comparison sites currently provide a list of the suppliers that they have a commission agreement with, however some switching sites make this information easier to find than others. We believe it is in the consumer interest for sites to make clear that a commission arrangement exists and how commission will affect the comparison process before the results page is delivered. This could be achieved by sites explaining on their homepage how commercial arrangements with suppliers may alter the results page.

 

  1. It is also in the consumer interest to see an accurate picture of the whole market. Currently, comparison sites give consumers the option to show a whole market view when they enter their search criteria. However, in the majority of cases, the default option is to show deals that customers can “switch to today” (tariffs from those suppliers that the site has a commercial relationship with).

 

  1. In order to ensure that the switching service is independent, and to allow customers to make a fully informed decision, we believe that the default option should be to provide customers with a view of the whole market.

 

  1. These changes could be delivered via a mandatory Confidence Code, coupled with stronger sanctions. See section three for further details.

 

Section 3: Arrangements for oversight of these websites

 

  1. In 2013, Ofgem inherited a Confidence Code that Consumer Futures introduced to help ensure consumers are protected and well-informed when they use price comparison sites. More recently, in October 2014, Ofgem issued a consultation on the Code and proposed various changes to enhance the framework and ensure that it reflects evolving changes in the market. These proposals included suggested principles to underpin the Code – independence, reliability, accuracy and transparency.

 

  1. Whilst we support Ofgem’s work to oversee these websites, we believe ambitious changes should be made to the Confidence Code. At the moment, we are concerned that the Code does not address issues that may be of concern to consumers, such as enhanced transparency around fees and commissions.

 

  1. We also remain concerned that the Code is voluntary and, as such, sites who want to operate outside of this can do so very easily. Indeed there are no sanctions, apart from expulsion from the Code, to tackle any behaviour that may cause consumer harm.

 

  1. In the interests of consumer protection and to ensure we improve trust in the market, British Gas would like to see a mandatory Confidence Code, which allows for the changes we have suggested throughout this response, such as transparency around fees and ensuring consumers are able to see a whole market view when deciding on which tariff to choose. The Code should then be coupled with stronger sanctions and a governance structure to allow for clear enforcement where there is a breach of the Code.

 

  1. To ensure that consumer protections do not vary across different third party intermediaries, we also suggest that the Confidence Code could be extended to cover collective switching and telephone discussions. In addition, whilst we have already expressed our concerns with commercial entities providing face-to-face advice, if switching sites are to explore this, there needs to be sufficient protection in place for consumers.

 

  1. We believe these changes would ensure that consumers are properly protected when using this important tool to engage with the energy market and would allow them to make fully informed decisions about their energy provider.

 

Section 4: Consumer trust in price comparison websites

 

  1. It is important that price comparison websites remain a trusted intermediary for consumers. However, transparency around commission and concerns about independence, may risk damaging consumer confidence in this channel.

 

  1. As outlined in detail above, we believe that a number of key changes around transparency and a more robust oversight regime will help to ensure that price comparison websites not only enhance engagement in the energy market, but also provide important protections for consumers at a time when switching sites are playing an increasingly prominent role in the energy market.

 

 

 

 

 

 

January 2015

[1] https://thisisthebigdeal.com/blog/research-into-price-comparison-websites