Ofgem energy reforms will leave you worse off!

Simplifying energy deals could leave households £55 million worse off according to new research from Which?

Ofgem energy reforms designed to save people money on energy bills could leave them worse off.

That's the warning from consumer champion Which? ahead of reforms due to come into force this summer.

According to the research, energy customers might end up paying £55 million more than they need to, if plans to introduce a Tariff Comparison Rate go ahead.

Ofgem plans

Earlier this year Ofgem announced a number of energy reforms to make comparing energy deals simpler and switching easier.

They included limiting the number of energy tariffs suppliers could offer as well as the introduction of a new Tariff Comparison Rate (TCR) to help compare the price of deals more effectively.

The Tariff Comparison Rate is meant to act in a similar way to the Annual Percentage Rate (APR). It will provide an illustrative cost for an energy tariff based on medium gas and electricity usage.

But this is where Which? has identified a problem.

Which? research

Despite the good intentions of the reforms Which? has estimated that over 3.4 million households will end up paying more than they need to because they could potentially be led onto the wrong deal by the TCR.

That’s because the TCR will be based on medium usage of both gas and electricity, but only 26% of customers use this level of energy. So nearly three quarters of people will be comparing prices that are not based on their actual energy usage.

According to the research around 500,000 low energy users, who also tend to be on lower incomes, could be mis-led onto the wrong tariff.

Which? claims that if a customer’s energy usage doesn’t exactly match this average TCR figure then there is the potential for people to choose a tariff which isn’t their cheapest option, meaning households could potentially pay £55 million extra.

Missing the point

Ofgem's official response to the research hinted that Which? had missed the point. A spokesperson said:

“Which? is misrepresenting the purpose of the tariff comparison rate and how it fits into the full scope of Ofgem’s reform package. The tariff comparison rate acts as a prompt to consumers to take a look at comparative deals... it is partnered with personalised consumption information necessary to make a full and accurate cross market comparison, which every supplier must provide via bills and annual statements."

Who to believe?

Although Ofgem makes a good point that Which? has taken the reforms out of context, you can see how the TCR could mess up.

Over simplifying the process of choosing a deal might mean people pay more. We asked energyhelpline.com to work out the cheapest deals for low usage and medium usage to see how they matched up.

Cheapest dual fuel deals: medium usage

All calculations are for an average usage dual fuel household paying by monthly direct debit. Average usage as defined by OFGEM is 16,500 kWh pa of gas and 3,300 kWh pa of electricity.

Source: energyhelpline.com

Cheapest dual fuel deals: low usage

All calculations are for an average usage dual fuel household paying by monthly direct debit. Low usage calculated at  11,000 kWh pa of gas and 2,100 kWh pa of electricity.

Source: energyhelpline.com

As you can see the top four cheapest suppliers aren't exactly the same, nor do they follow the same order. The second cheapest deal for a medium user would be from ScottishPower but for a low user it would be Sainsbury's Energy.

Ofgem said that its reforms will eventually take away the need to compare tariffs altogether as customers will be automatically put onto the cheapest deals - even if it means being changed to a rival supplier.

But removing the need to compare energy tariffs seems like a distant pipe dream at the moment and in the meantime Which? has put forward a proposal of its own.   

Single unit pricing

Which? is campaigning for the introduction of a single unit price for energy tariffs - similar to how petrol prices are displayed - to allow for easier comparison.

The watchdog thinks this is a better way for households to figure out the best deal.

Only one in ten could spot the cheapest energy deal from a range of standard tariffs in a previous study conducted by Which? But when presented with single unit pricing the success rate at spotting the best deal shot up to nine out of ten.

If you agree with the campaign, you can register your support for single unit prices online.

Compare gas and electricity tariffs.

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