EPW0017 - Evidence on Energy price comparison websites

Executive Summary

1.1. Price Comparison Websites such as comparethemarket.com are disruptive technologies that can deliver positive outcomes for consumers.

1.2. Competition in the energy market is driven by switching rates, the more consumers switch the more suppliers compete to secure their custom.

1.3. Switching rates in the energy market are abnormally low compared to other markets, especially when taking into consideration savings of up to £200 per household according to the Department for Energy and Climate Change and a range in December 2014 of our customers who saved, on average, £220.70 - £288.20.

1.4. Energy bills remain difficult to understand and there is no standard format to support better consumer education and awareness.

1.5. It takes too long to switch despite a new obligation from Ofgem that consumers must be switched within 17 days.

1.6. Commission payments represent a tiny fraction of the average household’s energy bill – better transparency of energy costs and confidence in the information available to consumers remain significant hurdles to improved competition in the energy market.

The role of energy Price Comparison Websites and how they operate

2.1. Ours is a results-based business, we only succeed if consumers can find better deals on our website than they can find via other sales channels. We are also as much a technology company as we are a financial services firm. Over the years we have invested significantly to create a platform that is easily accessible for consumers and that provides the most efficient route to market for product providers. Through what we do, comparethemarket.com creates a virtuous cycle through which greater efficiency benefits all key stakeholders. This cycle is set out below:

2.2. Price Comparison Websites operate as businesses to enable consumers to evaluate different financial and other products. The business model of comparethemarket.com relies, as all of our competitors do, on revenue derived from introducing suppliers to consumers. The growth and sustainability of our business depends on us providing an efficient method of distribution for suppliers and an accessible and value-adding service for consumers. The commercial model of comparethemarket.com is fully aligned with our consumer proposition. Our website is free to use for consumers and we receive remuneration only when the customer has entered into a new agreement with a supplier i.e. when the consumer has made a decision and acted upon it. In short if the consumer does not make a saving we receive nothing.

2.3. In recent years, Price Comparison Websites such as comparethemarket.com have significantly changed the marketplace for consumers purchasing energy and other products. With the cost of living an important issue for most people in the UK, price transparency and accessible comparison can help to lower energy costs and also drive market reform. In fact as Towers Watson admitted, in 2009 Price Comparison Websites’ impact on the motor insurance market cost “the UK insurance industry £1 billion in unnecessary price competition” – in reality that is £1 billion of savings for the consumer through enhanced competition.

2.4. Our business demonstrably benefits consumers and it does so through promoting competition. That can only be supported through a greater number of suppliers in the market place. Due to the efficiency of Price Comparison Websites as a marketing platform we have been able to support the growth of new entrants to the market i.e. non-Big Six suppliers. In 2013 the proportion of those switching from a Big Six supplier to a non-Big Six supplier via comparethemarket.com was 35 per cent. In 2014 this figure had increased to 52 per cent. We enable suppliers to outsource their marketing and lower their consumer acquisition costs, which reduces barriers to entry.

2.5. The more efficient we are as a platform the lower the cost of acquisition for energy suppliers and lower costs for suppliers can produce lower costs for the end consumer.

2.6. Consumer energy markets are characterised by long-standing and deeply embedded concerns that they do not function in the interests of consumers. We therefore support, and are currently fully participating in, the Competition and Markets Authority’s ongoing investigation. In addition we welcome the Energy and Climate Change Committee’s inquiry and we are committed to engaging in a proactive and constructive way with policymakers on these important issues. Obviously we are also keen to promote the ability of consumers to compare prices in this market in order to gain the benefits that they do in others such as motor insurance.

2.7. We have also invested significantly in our technology infrastructure and in sizable consumer education programmes. During 2014 one of the key parts of this was our campaign, The Great British Switch where we successfully campaigned for energy companies to drop their exit fees over the course of selected weekend so that consumers were not penalised for switching to a better deal. We also actively promote tariffs available from smaller suppliers. This work has created positive outcomes with market intelligence showing that approximately 60 per cent of consumers who switch through comparethemarket.com are not choosing tariffs from the “Big Six”.

Transparency of commission received for different energy plans

3.1. Our business model is wholly reliant on consumers choosing to buy a product from a supplier featured on our platform. Consumers will only do this if they can get a good deal. With the average energy bill (covering gas and electric) currently at £1,264, the amount paid in commission represents a tiny proportion of the overall cost. The cost of energy for retail consumers is driven simply by the price per kWh that the energy supplier charges.

3.2. We would also note that the level of commission paid by a supplier has no bearing on where they rank on our comparison tables. On our website, deals offered are simply ranked by the estimated cost to the consumer based on their inputted energy use and the cost of the energy used. Suppliers cannot currently boost their ranking by paying a higher commission.

3.3. The level of commission paid represents just one element of the cost of acquiring a consumer. The consumer’s interest is in seeing which deal is best for them. This is based on a number of elements but predominately in energy it is the cost of the electricity used (standing charges, day and night units etc) and the quality of service.

3.4. It is worth noting that Ofgem said this about commission transparency when they launched their consultation on the Confidence Code in July 2014:

“We have no evidence at this stage to suggest that it would be beneficial to give consumers information about the amount of commission that sites receive from each supplier. Indeed, current Code requirements mean the size of commission is irrelevant. In addition, such a requirement may reduce sites’ ability to negotiate with suppliers and damage competition in the sector. They could also need to renegotiate confidentiality agreements, which could be costly and time-consuming.”

3.5. In addition, the Confidence Code as it currently stands makes it clear that;

“The service provider must be independent of any gas or electricity supplier. It can take commission from suppliers but this must not influence the consistency of the provision of any information or data.”

3.6. In terms of transparency more broadly we can confirm there is no question of any non-disclosure on our part, the facts are as follows:

3.6.1. We differentiate between tariffs available to consumers through comparethemarket.com and those of which we are aware but which customers cannot obtain directly via comparethemarket.com. Whilst the differentiation exists, consumers are able to access all tariff information made available to comparethemarket.com.

3.6.2. The distinction in the way tariff information is disclosed is driven by our desire to go beyond the provision of information to facilitation of an alternative tariff. Equally, in many cases energy providers will restrict the availability of tariffs via comparethemarket.com particularly to existing customers of the provider.

3.6.3. Given our aim is to provide access to high quality suppliers we reserve the right not to offer deals with energy providers who, in our view, provide a poor quality service.

3.7. However, we continually review the operation of our website and always strive to deliver the best for consumers. Whilst we do not view commission transparency as having a positive impact for the end consumer, we would not want the more important changes to the market place to be obscured by a disproportionate focus on this one element.

Consumer trust in energy price comparison websites

4.1. Trust in Price Comparison Websites is needed in order for consumers to be comfortable using our service. The degree of trust placed in Price Comparison Websites is well reflected by consumer bodies. For example, Citizens Advice’s Advice Guide says that “Price comparison tools offer an easy way to compare the prices from lots of suppliers at once.” If trust in comparison websites is unjustly damaged this will only serve to keep switching levels very low which will be to the detriment of consumers.

4.2. Conversely energy companies record low levels of consumer trust. Survey results from January 2015, conducted by Millward Brown, found that 45 per cent of consumers distrust energy suppliers. It should be noted that energy suppliers are the most distrusted sector, ranking ahead of insurance providers (37 per cent) and banking (36 per cent) according to the same survey results. This chimes with recent data from the Department for Energy and Climate Change (Public Attitudes Tracker – Wave 11) showing that 42 per cent of consumers do not trust their energy supplier to give them a fair deal.

4.3. However, there is a long way to go to support consumer awareness of the benefits of switching and maintaining consumer trust in Price Comparison Websites is an important part of this. In December 2014 the average savings for consumers via comparethemarket.com ranged from £220.70 - £288.20. Despite such savings, 84 per cent of people who don’t change their energy supplier are aware it is possible to do so. This degree of consumer inertia is not unique to the domestic energy market but given the annual cost of energy its impact is sizable. This is the complete opposite of the motor insurance market where consumers check their contracts on an annual basis and are confident in both the information available and the process to switch providers every year should they wish to.

Arrangements for oversight of these websites, for example through the ‘Confidence Code’, a Code of Practice that governs independent energy price comparison sites

5.1. The energy comparison service we offer is underpinned by the energyhelpline.com (EHL). EHL’s service is accredited by Ofgem and meets the requirements of the regulator’s Confidence Code. The Code imposes a number of requirements and these are designed to protect consumers. Amongst these is the requirement for EHL to be independent and impartial. The code states that;

“The service provider must clearly identify on its website each supplier with whom the service provider has a commission agreement or from whom it receives any payment, either directly or indirectly.

“Advertisements from energy suppliers, their agents, affiliates, or brands operating under the licence of a supplier must not be displayed on the home/main page or on the energy price comparison pages of the service provider’s website.”

In addition, because the platform is operated by EHL, we do not negotiate contracts with the energy suppliers for selling their services. The result is that we receive an averaged out commission payment from EHL so we do not get told what the commission levels are for each energy provider.

5.2. We would support moves to bolster the Confidence Code and move from a voluntary system of accreditation to a regulatory requirement that all Price Comparison Websites comply with the Code. In addition, Ofgem would require new powers to impose penalties on any Price Comparison Website found to be in violation of the Code. As alternative forms of price comparison and energy supplier shopping have developed since the Code was initially devised we also suggest that its scope be expanded to include collective switching services and services that offer white-labelled solutions.

On the side of consumers

6.1. Whilst Price Comparison Websites have shaken up markets we have entered, most notably the car insurance market, there is still more that we can do. Research undertaken by both the Department for Energy and Climate Change and the regulator, Ofgem, provide contradictory results. Whilst DECC’s Public Attitudes Tracker (Wave 11, November 2014) found that 34 per cent of those surveyed expressed concern about their energy bills only 5 per cent were planning to switch supplier in 2015. Moreover, Ofgem’s figures from their State of the Market Assessment (2014) found that:

“62 per cent of customers could not recall ever having switched supplier. We also noted that 37 per cent of electricity customers were still being supplied by their regional incumbent, and 40 per cent of gas customers were being supplied by Centrica more than 15 years after the market was liberalised.”

6.2. This consumer inertia comes despite households being able to save on average £220.70 - £288.20 a year on their energy bills simply by switching energy supplier. It is clearly in the interests of the Big Six to suppress anything that encourages consumers to reassess their energy supplier. Inertia means that consumers remain committed to energy supply contracts that are not in their best interests. On the other hand we have a proven track record of delivering for consumers, evidenced by the way that we have impacted markets such as that for car insurance. It is vital that trust in Price Comparison Websites is not sacrificed based on a short-term view. It is also important to bear in mind that Price Comparison Websites remain the most transparent way for consumers to research alternatives to their current supplier.

Recommendations

7.1. We believe the following would help to increase consumer switching rates thus promoting competition in the energy market and support consumer trust:

7.2. Agree a standard format for energy bills.

7.3. Clearer sign-posting of consumers’ options to switch supplier and the potential savings they may make on every interaction e.g. letter or email with an energy supplier.

7.4. Create an annual trigger to encourage consumers to review their energy expenditure.

7.5. Introduce a switching guarantee modelled on that of the Payments Council for bank accounts. Under this model the energy supplier would guarantee that the consumer would suffer no loss of service and that any mistakes made in calculating bills would be the responsibility of the energy providers involved to rectify, not the consumer.

7.6. We would urge Ofgem to further reduce the time needed to switch supplier from 17 days to seven days.

7.7. Expand the scope of the Confidence Code to include collective switching services and all other forms of non-direct energy sales channels.

7.8. Consumer inertia remains a significant issue due to a combination of factors. We would suggest that where consumers have remained with the same supplier for more than 10 years that a new obligation is placed on the provider to seek sustained consent from those customers in order to continue service.

7.9. Ofgem should work with consumer advocacy groups to ensure that the forthcoming roll-out of Smart Meters (scheduled to being Autumn 2015) brings clear benefits to consumers and that access to Midata is provided in a way that makes it easy for consumers to shop around for alternative supply.

In conclusion

8.1. The energy market is in need of reform in order to drive better consumer outcomes. We believe that the recommendations identified in this submission would result in much more competitive market, increasing switching rates and resulting in more consumers paying less. We look forward to working with the regulators and energy suppliers in order to improve the information available to consumers and to support a more proactive way for them to manage their energy expenditure.

January 2015