You're subsidising your neighbour's energy bills!

If you fail to regularly shop around for energy tariffs, you're subsidising the cheap rates of those that do.

Are you a sticky customer?

For those unsure of what I mean, let me phrase the question another way: when did you last switch energy tariff?

New research from the Institute for Public Policy Research (IPPR) shows that so-called ‘sticky customers’ – those who stay put on one energy tariff, no matter what the price – are subsidising savvy customers who regularly switch.

Pricing differences

The IPPR data shows that some households are paying up to £330 a year more for energy than their neighbours, despite using an identical amount of gas and electricity.

The research looked at tariffs from the six major energy companies and found huge differences in the prices between standard tariffs and the cheapest fixed and online deals.

Scottish Power had the greatest variation with a £339 difference between the cheapest and standard tariff in Sheffield. In London, the difference between the provider’s tariffs was £333.

Npower had the second largest differential – up to £315 - while the three remaining suppliers (British Gas, EDF and SSE) all had more balanced pricing structures with variations ranging from £86 to £126.

Suppliers use the excess revenue from those on expensive standard tariffs to balance out the loss-leading cheap rates. So if you and your neighbour both use the same energy provider, but they have taken the time to switch onto a cheap tariff while you remain on the standard rate, you’re essentially subsidising their energy bills.

Stunts competition

It’s estimated that huge tariff differentials are causing over five million people to be overcharged. And in addition to the hit on consumers, the IPPR also says the industry as a whole is being damaged by these dubious pricing practices.

It’s only possible for energy companies to offer loss-leading tariffs if they have a large enough group of ‘sticky’ customers on expensive rates to balance the books. The dominance of the big six energy companies (they provide energy for 99% of the British public) means that they have this overpaying bulk customer base. But smaller providers do not – causing them to be blocked out of the market.

The IPPR is now pressing Ofgem, the energy regulator, to crackdown on these unfair pricing practices and ensure that tariffs are cost-reflective.

Switcher apathy

Here at lovemoney.com, we’re always encouraging you to constantly switch energy providers to get hold of the cheapest tariff. This research reinforces the importance of consistently looking for the best deal and never settling for a standard rate.

But it also highlights the problem of switcher apathy. According to consumer group Which? 60% of people have never changed energy suppliers. It estimates this is costing UK households £4.1 billion every year.

The problem is so severe, Which? has now launched the The Big Switch, a campaign designed to utilise the power of the group to negotiate a cheaper energy deal. Households have until the 31 March to sign up for the campaign, at which point Which? will hold a ‘reverse auction’ with the energy companies. The cheapest tariff will then be offered to everyone who signed up for the campaign.

Current best tariffs

For those looking to switch at the moment, here are the best deals currently around:

Source: energyhelpline.com. All tariffs available from the lovemoney.com energy centre.

* Average bill of £1,345 per year as estimated by Ofgem (16,500 kWh p.a. of gas and 3,300 kWh p.a. of electricity paying by monthly direct debit).

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