Response to Ofgem’s consultation on estimated annual costs for domestic consumers
Informed choices are essential for consumers to make good decisions in the market, and consumers having accurate estimates of costs are an important component of this. Given the complexity of energy pricing, consumers generally rely on estimates of total cost, rather than the actual tariff price, when choosing a tariff.
Ofgem’s recent consumer engagement survey found that financial risks - either costs going up or not saving as much as expected - are the main risks that consumers perceive with switching. It is vital that consumers receive accurate Estimated Annual Costs (EACs), in order to have the confidence to switch. The EAC also allows consumers to plan for their energy costs, and is used as the basis for important prompts to engage, such as the cheapest tariff message.
We recognise that recent changes to tariff rules, and the emergence of innovative tariffs, mean there is a need to change the current EAC methodology. We support Ofgem’s proposed principles, and consider that in future smart metering and midata should mean that most estimates can be based on historic consumption data. This approach should also remove the scope for suppliers and price comparison websites (PCWs) to make assumptions about how consumer behaviour will change in response to a time of use tariff. We also support the removal of the requirement for the estimate to be forward-looking, as this has been confusing for some consumers.
However, the removal of a single, prescribed methodology means that consumers will receive different estimates for the same product, depending on which supplier or PCW they use. This will increase the risk that consumers are confused about the costs they are likely to pay, and could allow companies to be intentionally misleading. Suppliers and PCWs must be clear and transparent about how they have calculated these costs, and why differences may arise between companies. We don’t see any cause for the EACs for simple tariffs to be considerably different. Ofgem should monitor the variability of EACs following these changes, and take action if alternative sources are substantially different.