Price cap could save UK prepayment customers £300 million a year

The UK’s four million prepayment households could collectively save £300 million a year on their energy costs, thanks to temporary price controls proposed by the Competition and Markets Authority (CMA).

The price cap for customers on prepayment meters is one of a wider set of recommendations announced by the competition watchdog following its 18-month investigation into the energy market. The investigation pinpointed a range of competition issues affecting the prepayment segment, including a more limited choice of suppliers and tariffs, and significantly higher energy prices than for credit customers. The prepayment price control would run during the transition to smart metering, from 2017 until the end of 2020.

Competition “significantly weaker” in prepay segment

Fast facts for UK prepayment sector
Fast facts for UK prepayment sector (CMA data)

The CMA found that competition in the prepayment segment was “significantly weaker” than in the wider domestic retail energy market. There are fewer suppliers offering prepayment, a much more limited range of tariffs than for credit customers, and the cheapest tariffs are considerably higher than those available to customers paying by direct debit. In its most up-to-date analysis, the CMA found the cost differential between the two payment methods was from GBP260 to GBP300, depending on the region – well in excess of its earlier estimate of GBP54.

According to the competition watchdog, prepayment customers also tend to be less engaged in switching supplier than direct debit customers (but not less so than those on standard credit terms). Prepayment customers include a higher proportion of people on low incomes, living in social rented housing or with disabilities – all factors that have been associated with lower engagement in the retail energy market. Prepayment customers are also less likely to have access to the Internet or to be confident in using price comparison websites. The lower available savings from switching for these customers and confusion over the right to switch for customers in debt are likely also to depress switching behaviour.

Roger Witcomb, Chairman of the energy market investigation, said: “For customers on prepayment meters, a group which contains some of the most vulnerable customers, their options are far more limited. It’s more difficult for their suppliers to compete, more difficult for such customers to switch, and they have far fewer tariff choices. Energy is both an essential and expensive item for many of these 4 million households, whose cheapest tariffs are around £300 more expensive than for other customers. That’s why we’re proposing a transitional price control for them which will remain in place until 2020, by which time they too will be able to benefit from our measures, and from other future developments like the roll-out of smart meters.”

It is anticipated that the level of the price cap will be broadly in line with the cheapest available prepayment prices and could save prepayment customers on average over 8% on their fuel costs. The price cap will apply to mid-tier and smaller suppliers as well as the Big Six and larger alternative energy retailers, so all those serving the prepayment segment will need to consider the repercussions for their businesses.

Mixed reception

The CMA’s proposals for the prepayment segment have met with a mixed response from the energy community.

Bill Bullen, MD of Utilita Energy welcomed the CMA’s proposals. “Prepayment has always been, and will remain, at the heart of our business – around 99% of our customers have prepay meters. We welcome the recognition by the CMA that more needs to be done to ensure they have access to the quality offers and support they need.” In his statement, Bullen reiterated Utilita’s long-standing commitment to offering competitive pricing that is cheaper than the Big Six for both dual fuel and variable prepayment tariffs – a strategy that has been underpinned by the supplier’s early adoption of smart metering technology. He added: “We agree with the CMA that Smart roll-out is vital for these customers, and the best protection for them – we have led the way in this area, installing smart meters for all our customers free of charge.”

Consumer champion Citizens Advice also reacted positively to the CMA’s report. Chief Executive Gillian Guy said: “The UK energy market doesn’t work for all consumers. Prepayment meter customers get a particularly shoddy deal – it is more expensive, inconvenient to top up and consumers are usually excluded from the cheapest energy deals. It is good the CMA has acknowledged prepay customers need better protection and a price control is a very positive step for the millions of households who use this payment method and often get a raw deal.”

But Fuel Poverty Action’s Laura Hill slammed the investigation’s recommendations, saying they would have little impact on those struggling to heat their homes. “The Big Six have broken into people’s homes to forcibly install prepayment meters, have locked social housing tenants into expensive 40-year contracts, force people to self-disconnect because they cannot afford to keep their meter topped up and have refused to lower prices after the recent price drops. This price cap will do nothing to protect these people.”

Hill added: “This is a massive win for the Big Six and has once again shown our current, for-profit energy system is broken. Only an affordable, clean and public energy system will make a meaningful different to those affected by fuel poverty and energy debt. Nottingham Council’s Robin Hood Energy has already demonstrated this.”

The CMA will publish its final report on the energy market investigation in June, after consideration of stakeholder responses to this month’s provisional decision.