Switching sites are helping, not hindering the energy market
Scott Byrom explains how switching sites support consumers in the energy market
Energy price comparison and switching websites have come under fire recently, with a spokesperson for one company blaming such services for increasing the cost of household bills.
According to Ramsay Dunning, group general manager of Co-Operative Energy, the commission fees that switching sites charge suppliers are part of the reason why prices have been rising. It's an interesting argument, but placing the blame at the feet of these services is a big mistake.
The fact is that switching sites have a hugely beneficial impact on the energy market, and there is plenty of evidence to demonstrate the essential role they have to play:
- Currently, only 10% of consumers switch their domestic energy tariff each year (DECC energy switching trends)
- Of those that do, 55% are prompted to do so by a switching site (YouGov research)
- 30% will go on to switch via the switching site, with the rest applying direct to the supplier(s) - or through other third parties such as cashback websites
- Commission is only paid on successful applications made through the switching site, and this has no impact on the price the consumer is charged by the supplier. Tariffs are not more expensive if they're acquired on a switching site.
- Average savings of £211.95 per household (UKPower.co.uk figures)
- November 2013 saw 615,000 electricity switches, with consumers making a potential saving of £130m at a time suppliers put prices up by 3.3%
The numbers speak for themselves, and the only conclusion that can be drawn is that a significant number of people would not be engaging with the energy market - or saving money on their bills - if it wasn't for switching sites.
Trust and confidence
An important thing to bear in mind when analysing switching services is that any Ofgem accredited site has to adhere to the regulator's Code of Confidence.
One of the key aspects of this code is that accredited services have to remain completely impartial - they cannot favour suppliers or tariffs based on the commission they receive, but simply present consumers with the cheapest available options.
Commission has to be considered as a marketing cost to the supplier - an expense that they and any other business face in order to acquire customers.
It's true that sites will initially show visitors only the deals they're able to sell, not the whole range of tariffs that are available on the wider market.
However, under the Code of Confidence, people are also offered the choice of a 'whole of market' view as a secondary option. This displays all tariffs that are available to consumers, irrespective of whether or not the site is authorised to arrange them.
Free and impartial
There is a good reason that a complete market view is not provided in the first round of results. In the past, suppliers took advantage of the free marketing platform offered by switching sites to advertise 'Go Direct' tariffs. These were only available to people who directly agreed a deal with the supplier.
This left many switching services - which, as we've demonstrated, are vital for prompting people to change supplier - at risk of going out of business. It also meant suppliers were able to abuse the exposure switching websites gave them by securing customers without paying a penny for advertising or commission.
That's also why the Code of Confidence was designed. It means that, by default, switching sites can only show the tariffs they are able to sell - but the option of a whole market view is still there if the consumer chooses to take it. This setup also incentivises switching services to work with as many suppliers as possible, and UK Power currently compares more companies than any other site.
As part of their own business model, switching sites do charge suppliers commission for signing consumers up to their tariffs - but the cost the customer pays is the same whether they apply direct or via a comparison site.
Commission has to be considered as a marketing cost to the supplier - an expense that they and any other business face in order to acquire customers. It's a strong and widely accepted view within the industry that this fee is significantly lower than the costs suppliers would face for carrying out other marketing activity themselves, for example on TV or radio.
Similarly, it shouldn't be forgotten that 55% of switches are prompted by switching sites at absolutely no cost to the supplier. That's because sites only receive fees for a switch made through the service itself.
The money that switching sites do receive is spent in two main areas:
- Staff - the cost of database maintenance, site development, account management, call centre agents, compliance, legal costs and similar roles.
- Advertising e.g. Google (PPC), TV, radio, press and other costs designed to attract consumers to their respective websites.
Mr Dunning's comments on transparency around commission do merit some debate.
Currently, the information is not displayed because it is contractually confidential, and it must be pointed out that such arrangements are generally at the request of the supplier. Indeed, it is their contract which bonds the partnership and allows the switching site to fulfil the application process on behalf of the supplier.
In the interests of transparency, it would be fair to suggest that all switching sites list this information or, better still, that an industry standard amount is reached in order to create an even playing field.
As an aside, it's important to note that - as with any industry - the larger switching sites driving higher volumes are likely to warrant a higher commission. Likewise, suppliers can negotiate different commercial terms, with fees known to range between £17.50 per fuel (£35 dual fuel) and £30 per fuel (£60 dual fuel).
Helping the market
Beyond the vital service they provide consumers, switching sites are also a pivotal marketing platform for those suppliers outside of the Big Six, enabling new entrants to get their brands off the ground with no upfront marketing costs whatsoever.
Ultimately, it is wrong for switching sites to be tarnished with the damaged brush of the energy market - the majority of these services are becoming beacons of light.
As a result, new suppliers only pay for 'live' customers and see an instant return for their investment - far more efficient than expensive marketing campaigns which can easily result in millions being spent for little or no gain.
Such activity is essential for improving competition in the market and giving consumers a wider choice - something the government has consistently encouraged as a means to drive down prices.
All things considered, the fact remains that switching sites are consumer champions, providing a vital service for the public in a market controlled by six energy suppliers that boast 99% of household accounts.
While the biggest suppliers have encountered little engagement from customers looking for a better deal, switching services have enabled consumers to fight back against higher energy costs and make significant savings on their energy bills. Average savings currently exceed £210 a year.
As such sites grow, they will drive further competition and innovation within the energy market, forcing suppliers to think differently about how they retain and acquire their customer base.
With their technical capabilities, these services are driving the industry towards new ways of enabling quicker and easier switching processes, including the introduction of miData and QR Codes to give consumers the freedom to switch at the click of a button
Ultimately, it is wrong for switching sites to be tarnished with the damaged brush of the energy market - the majority of these services are becoming beacons of light, fighting on behalf of consumers to achieve fairer and cheaper energy prices.
Doing what is right for the consumer is not just essential for these services; it's a matter of life or death for their businesses.
Scott has worked in the energy sector since 2006 and is a regular commentator on consumer issues in the industry in the UK media. Scott joined Make It Cheaper and its sister company UK Power in 2012 to use his passion and expertise to empower UK consumers to spend less and use less energy in their homes.
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