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Publications / Consultation responses

Energy UK repsonse to DESNZ consultation on Future Default Tariffs

We welcome DESNZ’ consultation. This is a key area of importance when considering what the future retail market will need to achieve.

We welcome engagement from Ofgem and DESNZ in this area – and the wider price cap programme of work underway across government – and would like to see this continue. It is good to see government bodies working together across linked areas. This approach is essential to ensure complex issues are not considered in isolated silos, as this could result in conflicting and overly complex solutions which could have unnecessary costs amd unintended consequences for the development of the sector. We support Ofgem reviewing price protection in light of MHHS, and DESNZ should continue to support Ofgem through this process.

An effective, competitive retail market requires customers to be engaged and to make active choices. This is supported by suppliers’ ability to invest in and deliver excellent customer service and innovative products. The policy goal of reform should therefore be to stimulate incentives to engage. Government should consider how to achieve this by considering the following categories of customer:

  • Those who can engage, and do;
  • Those who can engage, but choose not to;
  • Those who cannot engage.

We think DESNZ should focus its efforts on protecting those vulnerable consumers that have barriers to engagement. There will be a minority of financially vulnerable customers who are high energy users but unable to shift the time of their use, for example due to a reliance on medical equipment.

Those that have chosen a smart tariff have shown they can engage in the market. As a result, while legitimately seeking to provide protections for all, Ofgem should be seeking not to force all customers to pay for protections for those that can engage but choose not to.

Energy UK notes that price protection is not an affordability measure, and that targeted taxpayer support is the only way to ensure affordability in a progressive way.

Energy UK questions whether all risks addressed in this consultation need to be addressed simultaneously, and at this point in time. We cannot fully understand the nature and extent of future risks for customers on Time of Use (ToU) tariffs before MHHS is delivered and with the current spread of ToU adoption across the market.

Therefore we believe DESNZ should take a risk-based, phased approach to this subject which is proportionate and step by step. While DESNZ is right to ask the question, it is not self-evident that all default tariffs need to become ToU the moment MHHS commences. On the dynamic element, we believe there is time to wait a few years and see how the market for ToU develops, and to determine the impact of MHHS, but in the meantime government should conduct analysis which models projected customer behaviours and their impacts.

The price cap will also need to be reformed to ensure it is suitable for the changing energy market – including the move to MHHS and electrification. This should support the benefits realisation of MHHS and good energy outcomes for customers, addressing and mitigating the risk of a loyalty penalty. If the price cap is still in place in future, an overly stringent cap which limits the scope for suppliers to incentivise and reward customers for flexible behaviour may dampen engagement, impacting the system-wide benefits of flexibility.

Energy UK broadly agrees with DESNZ’ proposed principles. However, Principle 2 could be redrafted to say a default tariff should not be unnecessarily complex, and should ensure the costs incurred are fair. The current drafting suggests that default tariffs should guide customer behaviour.

An additional principle could be included to reflect that default tariffs should be a backstop, not a first choice, and policy should first seek to promote customer engagement with their energy choices.

DESNZ proposals should not limit customer engagement in the market. We are already seeing price competition return to the market and we expect this to continue. We are also seeing increasing non-price competition based on other factors like service and product. While we expect competition to return to the market, an overly stringent cap – alongside regulatory uncertainty – limits the potential for price competition, as noted above.

Proportionate and well-targeted regulation will better facilitate service offerings and engagement – this should be the priority to minimise the role of default tariffs and the need for protection.

Enabling suppliers to incentivise engagement among the highest proportion of their customer base will support effective cost recovery, service tailoring, and offer better outcomes for customers. This means allowing an acceptable level of risk for customers where they choose not to engage with their energy supply.

The process of defining those who cannot engage and cannot be exposed to an acceptable level of risk should focus on the vulnerable and low-income customers.

Energy UK is keen to understand DESNZ’ reasoning as to why a ToU customer, in particular, would not be able to engage and/or not be at fault for moving onto a default tariff, as presumably they will have previously decided to actively engage in their energy supply.

Energy UK notes that there is a difference between ‘can’t’ and ‘won’t’ customer engagement behaviour – and protections need to be focused on those who cannot engage. Hypothetically, in future DESNZ or Ofgem could observe that system costs are increasing as a result of a significant number of EV owners not engaging in the market and/or are on the whole not choosing ToU or smart products. However, we have not seen any evidence of this to date and are wary of anticipating problems that have not yet arisen. If this issue were to arise, the primary policy objective in this instance should be to encourage these customers to engage more actively in the market. DESNZ should therefore be realistic about the scope for default tariffs to optimise outcomes for individual consumers.

Energy UK understands that customers with flexible products, such as EV tariffs, are more likely to be engaged with their energy supply. The understanding of the nature of this group of customers may evolve as the MHHS transition gets underway, but so long as the regulatory framework enables suppliers to incentivise and reward flexibility appropriately we would expect customers who have found smart tariffs suit their circumstances to continue to choose them in preference to default alternatives.

For customers on static ToU tariffs the existing default E7/E10 tariffs available through most suppliers could fulfil this function, and these products are relatively straightforward for customers to understand.

Energy UK also notes that EV owners who are using commercial chargers, and their ability to plug their EV in overnight, needs to be taken into account.