Should Energy Customers be Empowered or Protected?

(by Catherine Waddams) The Competition and Markets Authority (CMA) has argued that competition is the way to empower most energy customers, but that prepayment users need additional protection. The compromise highlights the tension between competition and protection, because although competition is often the best way to ensure the lowest average prices and highest service quality for consumers on average, it is a process which carries no guarantees about the outcomes, nor about which particular customers and providers may win and lose from the process.

My colleague, David Deller, concludes in his blog post that the CMA’s provisional remedies, published last week, are inadequate to address the detriment identified. These remedies include a price cap only in the prepayment market, since the CMA conclude that ‘disengagement and weak consumer response is a more significant problem’ in this market, and they calculate that the detriment in this market is greater than elsewhere in the residential market. While not strictly a competition concern, the fact that prepayment meter users spend a higher proportion of their household income on energy, and include a larger share of vulnerable households than average, provides additional motivation to protect this group.

This cap on prepayment prices will provide short term protection for many households who may be struggling financially, though it may also dampen incentives for suppliers. There will be little stimulation to competition for this part of the market in the short term: if the cap is effective, companies will not find this sector very profitable, and are unlikely to offer good deals lower than the cap to attract consumers. Since the main driver of switching is anticipated savings[1], lower savings mean that customers will not be stimulated to find better deals; and, if they feel protected, these customers are less likely to look for the best prices themselves (but may receive valuable peace of mind, as well as real financial protection).

Any intervention is a balance between protecting particular groups and often ‘unintended consequences’[2], and it is important that the way the cap is calculated should not distort other parts of the market. If the reference price is too closely related to other offers in the market, companies may be deterred from making good deals available to direct debit customers for fear that this will bring down the price they are allowed to charge in the prepayment market. The CMA is aware of the dangers in principle, and needs to ensure that its tariff cap is designed carefully to avoid such consequences. The group as a whole believes that rolling out such a remedy to the entire residential market would generate more problems than benefits, so have restricted the cap to a section where competition problems, detriment and need are particularly high. One member of the CMA group, Martin Cave, considers that the whole residential market needs such protection.

Given the importance of energy in our daily (and business) lives, this market generates strong feelings and opposing views. Is the (competition) glass half empty, and needing intervention? Or is it half full, and better left alone? As a careful compromise, this remedy is likely to be attacked by those who think it has not gone far enough and those who think it has gone too far. Given the sensitive nature of the market, the identified existing detriment to prepayment meter users and the higher level of need among this group, this relatively small and temporary intervention represents a balanced approach to a difficult conundrum.

Whether the CMA’s other consumer remedies will be effective in empowering households and microbusinesses buying energy is less clear. This will be considered in a further blog post.

[1] see eg ‘Empirical evidence of consumer response in regulated markets’ by Catherine Waddams Price and Minyan Zhu, Journal of Competition Law and Economics 2016 12 (1): 113-149 http://jcle.oxfordjournals.org/cgi/reprint/nhv041? ijkey=ew5HazaOgQxE81U&keytype=ref

[2] As the British energy regulator found to its cost with non discrimination clauses – see ‘Non-discrimination clauses in the retail energy sector’, by Morten Hviid and Catherine Waddams Price in The Economic Journal, 122, F236-252, 2012; and ‘Non-discrimination clauses: their effect on GB Retail Energy Prices 2005-2013’ by Catherine Waddams Price and Minyan Zhu in The Energy Journal, 2016.

 

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