Customer Experience

Why customers switch utilities

March 2019

Recent statistics from Ofgem suggest that 5.1 million electricity customers and 4.1 million gas users switched supplier in 2017 – the highest number for almost a decade.

Whilst those who push for additional market competition herald this as big news it’s important to recognise that more than a third of those switching from one of the so-called ‘Big Six’ (British Gas, E.on, EDF Energy, Npower, Scottish Power and SSE) switched to a different ‘Big Six’ company. The market share stands at 79% for electricity and 78% for gas in December 2017 for these six organisations (albeit down from 84% a year before).

So, the question remains – is this the start of a trend or a customer reaction to price and the availability of cheaper tariffs?

What is the reality of switching?

Rates of switching are an important indicator of the extent of competition in the energy market. However, the speed of switching is also important, as is the quality of the outcome – i.e. that customers switch to a new tariff that is better value than the old one.

Generally speaking, switching rates have shown a falling trend from 2008 to 2014 despite persistent price differentials between energy companies and potentially large savings from switching. Ofgem explains this falling trend due to the withdrawal from doorstep selling by the six largest suppliers (and hence there being less direct stimulus for switching). The trend lines on the graph below also show that the overall picture is of a decrease in switching rates between 2008 and present, for both gas and electricity. It explains the peak in 2014 due to extensive publicity and media interest surrounding  price rises at the time.

It’s interesting to observe that whilst this peak did fall significantly back to its previous low, it has since been climbing steadily. Let’s consider why and what has been driving this trend.

Number of customers switching - electricity and gas (UK)

Starting from a low base of ‘apathy’

The reality is that large numbers of consumers don’t switch or switch very rarely. In surveys 35% of consumers tell Ofgem that they have never switched supplier, while 23% say they have done so only once (58% in total). Typically, around 35% of electricity customers are still being supplied by their regional incumbent and 40% of gas customers are still being supplied by British Gas / Centrica more than 15 years after the market was liberalised.

Analysis suggests that customers who are apathetic or less engaged consumers are more likely to be on standard (usually more expensive) variable tariffs. As of April 2017, three fifths of customer accounts were on variable tariffs for example. If customers do switch, the Competitions and Markets Authority (CMA) has found that they could be at least £300 a year better off. Moneysupermarket suggests that the best value deals are £229 cheaper than the standard tariffs.

As Which? puts it: “It’s good to see switching levels increasing, but there are still 20 million people who are stuck on some of the most expensive standard tariffs, paying over the odds for their energy.”

Substantial new entry

Retail energy markets have seen new entry in recent years, driven on by falling wholesale prices and increased wholesale market liquidity. Ofgem cites that in June 2017, there were 49 domestic retail suppliers offering electricity and gas, an increase of 11 gas and electricity suppliers on the year before.

Ofgem launched its Switching Programme in 2015 with the aim of reducing complexity for suppliers and minimising delays and errors for consumers. As Ofgem notes, challenges still remain with 26 million switch requests submitted to network operators but only 22.6 million switches actually taking place between April 2014 and June 2017. It attributes 1.7 million switching requests to supplier objections such as customer debts outstanding.

An additional focus for Ofgem has been on switching times. It notes that average switching times for domestic consumers have fallen from 18 days for electricity and 23 days for gas in May 2014 to around 16 days from 2015 to present.

Getting transparency in the switching comparison market

At present, around 50% of switchers state that they have found tariff information online. Typically, this is through one of the leading price comparison websites. Consumer confidence in the energy sector and trust in energy suppliers is still low and has been for a number of years. Price comparison websites therefore play an important role in helping consumers shop around for tariffs.

The UK Government has been particularly concerned about the default presentation of deals by some websites; the misleading language used to provide consumers with a choice of which to pick; and the lack of transparency about commission arrangements for certain tariffs or deals. Signs are that these issues have been changing and the price comparison consumer experience has been improving.

Why customers switch

Saving money is by far the main reason customers cite for switching supplier or tariff, with 91% of consumers who have switched mentioning it as a motive in research surveys. Better customer service is another driver.

Switching has increased its upward trend in 2017 with rolling annual switching rates reaching almost 17% in June 2017, the highest since August 2011. The internet and visibility of tariff information through switching sites is clearly presenting benefits to consumers who want to switch.

CMA directed changes

Ofgem reported in August 2018 on the results of a trial of 1,400 customers to encourage more switching. This was, in part, a response to an 18 month investigation by the Competition and Markets Authority which concluded in 2017.

It raised concerns that customers are being overcharged by £1.7bn a year in total and called for a new database of customers who have been on standard variable tariffs for more than three years, alongside a price cap for households who get their gas and electricity supplied through pre-payment meters. In Ofgem’s switching trial half of consumers received offers direct from other suppliers, with the other half receiving a letter from Ofgem setting out cheaper deals from suppliers.

Ofgem's simplified collective switch trial, which ran between February and April 2018 included around 50,000 customers from one energy supplier who had been on a standard variable tariff for three years or more. Headline results from the trial have shown that 22.4% of customers in the trial switched overall with averaged savings of around £300 each. Approximately half chose the collective switch tariff and just under a quarter moved to other cheaper deals. This level of direct engagement was seen as positive by Ofgem and will lead to further larger scale trials in Autumn 2018, but even in this trial there was still a good degree of apathy and customers who even when heavily engaged still did not switch.

Smart metering

Smart metering has great potential to enable easier visibility of consumption data, provide tariff transparency and enable easier tariff and energy company switching. In the short term challenges remain due to the 8.6 million first generation, or SMETS1, meters which have been installed to-date. Given systems designed to handle newer (SMETS2) meters are not ready the cut-off date has been moved to October 2018 potentially leading to an additional 1 million SMETS1 meters being installed.

In some circumstances energy suppliers could be permitted to install the first generation meters for a further six months, meaning they could still be going into homes until spring 2019. The concern is that SMETS1 meters currently hinder customers from switching as they use existing mobile phone networks and usually a  communications system specific to each supplier. The UK Government has promised that customers with SMETS 1 meters will be able to access software so that they can be inter-operable with the SMETS 2 devices, during 2018, but the issue remains at present.

From an enduring perspective, however, smart meters will also allow consumers on smart tariffs that respond to and incentivise off peak consumption. They will also allow next-day switching and intend to make switching suppliers easier and quicker. The smart meters operated through the national infrastructure (due with SMETS2) will be operable by all energy suppliers.

What comes next?

Political pressure is clearly mounting towards continuing to encourage switching for a range of valid reasons. All the same it is notable that Greg Clark, the current energy secretary, admitted when asked in 2017 that he had never himself switched electricity or gas supplier!

More action is needed to drive simplification and even greater transparency in energy pricing. This needs to be done hand in hand with fostering a market (and switching comparison mechanism) that consumers can trust. With more customers voting with their feet, suppliers need to continue to look at what they offer to their customers, or risk losing them.

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