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Lowest price enforcement on energy tariffs could do more harm than good

posted on 19/10/2012 13:13:48 by Jonathan Elliott

Make It Cheaper managing director Jonathan Elliott has doubts about the effectiveness of an enforced pricing policy

Energy: Will legislation really help keep prices down?

Energy prices are back in the news after David Cameron told MPs about plans for new legislation that will force suppliers to offer all their customers the lowest gas and electricity tariffs. It's difficult to view his announcement, however, as anything other than a kneejerk reaction to the high profile price hikes from big suppliers that hit the headlines last week.

If the Prime Minister's goal is to get the lowest possible prices for consumers - which presumably it is - this method of going about it is flawed at best. As I see it, market forces surely dictate that if everybody is on the lowest tariff, then the lowest tariff will be considerably more expensive than it is now. Suppliers know their maths - and they will ensure that any new legislation will make a minimal impact on their profits by hiking up the prices of their lowest tariffs.

If everybody is on the lowest tariff, then the lowest tariff will be considerably more expensive than it is now. Suppliers will ensure that the legislation makes a minimal impact on profits by hiking up prices

Energy is a commodity that customers - everyone with a home or business premises - are often reluctant to engage with. But the fact of the matter is that customer inertia is one of the main reasons why prices keep going up.

When customers establish contact with suppliers or price comparison services, that's when energy companies are prompted to react and offer proactive customers their best rates. For businesses, for example, the best switching price on electricity is 9.5 pence per unit, whereas a typical renewal price is 14.25 pence per unit - a considerable 30% more.

Excuse the pun, but decision makers should perhaps be putting their energy into encouraging customer engagement in order to stimulate competition in the market - rather than proposing legislation that could quite conceivably have the opposite effect.

Jonathan Elliott

Jonathan Elliott is Make It Cheaper's CEO and founder. He recognises that small businesses are the lifeblood of the British economy, and is passionate about making it easy for them to save time and money, boost their profits and improve prospects for growth. As a vocal campaigner for fair treatment of SMEs by utility companies, Jonathan collected ‘SME Consumer Champion’ & ‘Most Trusted’ at the 2013 Energy Live Consultancy Awards.

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