Ofgem publishes analysis on price differences between payment methods

Publication date
20th May 2014
Information type
Policy area
  • Difference in prices between payment methods have fallen significantly since Ofgem rules were introduced
  • Ofgem analysis shows these industry-wide differences reflect the varying costs suppliers face for providing different ways to pay for energy
  • Ofgem now requires suppliers to tell consumers regularly what their cheapest tariffs are so they could save money by changing their payment method
  • Suppliers must work harder to explain to customers why these price differences exist and ensure they understand what their choices are

Today Ofgem published its findings on the different charges energy consumers pay, depending on their payment method.

Ofgem rules allow suppliers to charge different prices for different payment methods, but only if the amount reflects the cost of providing those accounts. The rules, introduced in 2009, protect consumers and take into account that some payment methods are more expensive to administer than others. For example, it costs suppliers more to provide pre-payment meter accounts than direct debit accounts.

Customers who use prepayment meters are now charged around £80 a year more on average compared with direct debit customers for dual fuel. This is a significant fall as the difference was almost £140 in 2009. Ofgem is satisfied that across the market the price on different payment methods reflects the varying costs suppliers face in providing them. The price difference for quarterly payment compared to direct debit has remained at around £80 since 2009.

How suppliers allocate costs of different payment methods is complex and any changes will impact consumers in different ways. For example, spreading costs across all customers would likely benefit quarterly payment and prepayment customers. However, the majority of consumers pay by direct debit (including half of all fuel-poor households) so any change would mean these consumers would pay more.

Ofgem will continue to monitor the market and take action where suppliers fall short of the rules. Ofgem will also hold a meeting with suppliers and other stakeholders in the coming months to discuss these price differences.

Since the start of April, Ofgem has required suppliers to start telling consumers what their cheapest deals are, on all bills and other communications. This means it will be far clearer for consumers to see if they can save money by changing their payment method. These rules also make it much easier for consumers to compare other deals on offer. They could save up to £200 by switching and Ofgem advises them to regularly check they are on the best deal for them.

Rachel Fletcher, Senior Partner for Markets said: “We have found that price differences between payment methods reflect the costs suppliers face, and that they have dropped significantly since Ofgem introduced the rules.

“However, to help re-build trust suppliers must do more to explain to their customers and interested stakeholders about what drives these price differences. Given public concern over these differences we also urge suppliers to also look at how they can provide more reassurance to consumers that they are set fairly. And now that our reforms are in place giving consumers clearer information on bills and other communications, suppliers should be working to explain where consumers could make savings by switching payment method, where possible.”

-Ends-

Notes to editors

1. Price differences

  • As part of Ofgem’s regular monitoring of the energy market we issued an information request to suppliers in February about their approaches to setting price differences.

2. Ofgem’s analysis showed that some larger suppliers do spread some of the costs of prepayment customers among the whole of their customer base. This is consistent with regulations and guidance, which allow for differences. These result in reduced price differences for vulnerable customers, who often do not have the option of alternative payment methods. 

Recent debate has suggested capping or spreading costs across all customers. Currently, Ofgem’s rules give suppliers the flexibility to allocate their costs in a variety of ways while remaining cost-reflective. Suppliers can also charge the same price regardless of payment method, so they can spread the costs they incur across all customers.

How suppliers allocate costs of different payment methods is complex and any changes will impact consumers in different ways. For example, spreading costs across all customers would likely benefit quarterly payment and prepayment customers. However, the majority of consumers pay by direct debit (including half of all fuel-poor households) so any change would mean these consumers would pay more.

Ofgem is not proposing to prescribe how costs are allocated given there is no single approach that would obviously benefit consumers. However there is a clear need for suppliers to justify how they allocate costs and work to improve clarity around their pricing.

3. About Ofgem

Ofgem is the Office of the Gas and Electricity Markets, which supports the Gas and Electricity Markets Authority, the regulator of the gas and electricity industries in Great Britain. The Authority's functions are set out mainly in the Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000. In this note, the functions of the Authority under all the relevant Acts are, for simplicity, described as the functions of Ofgem.

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