Dermot Nolan speech at Edelman PR: Building trust in the energy sector
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Dermot Nolan was speaking on 4 May at the launch of Edelman’s annual survey into the level of public trust in the energy industry
"Today’s event is all about trust.
The dictionary definition of trust is the firm belief in the reliability, truth or ability of someone or something.
So when we think about the energy industry’s reputation, it should not come as a great surprise that people have little trust in it.
It’s borne out by the facts.
We can see from Edelman’s trust survey today that last year the UK’s energy sector ranked fourth from last globally.
Trust has picked up since the dark days of 2014 but energy still lags behind other sectors in the UK.
Now, I don’t want to depress you all too much.
After all, the title of this talk is “Building trust in the energy sector”.
We will get onto that I promise.
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But before we do I want to try to answer why trust is so low.
It’s fair to say that many of the energy companies which Ofgem regulates have done more than their fair share to erode trust.
We referred the energy market to the Competition and Markets Authority two years ago because we did not think it was working for all consumers.
In March when it published its provisional decision on remedies - the last step before the final report next month – the CMA said that the large energy suppliers have been overcharging millions of households over the last few years.
Add in persistently poor customer service by some and it’s no wonder that many people don’t trust energy companies.
They have been failing many of their customers for too long.
At the heart of these failings, the CMA said, is a fundamental lack of competition in the market.
The six largest suppliers are still charging customers who have never switched far more than their new customers.
70% of households in Great Britain remain on expensive standard variable tariffs, paying on average £325 more a year than those switching to the cheapest deals.
People who don’t switch are more likely to be vulnerable, such as pensioners or those on benefits.
It seems hard to justify charging these customers over the odds.
The large energy suppliers appear to be taking them for granted and feel they can get away with it.
In proper competitive markets, companies who overcharge customers and give them shoddy service quickly lose market share to those who don’t.
However in today’s energy market, these suppliers feel that many of their customers will stick with them no matter what.
The CMA has given us an opportunity to change this by injecting a dose of competition into the energy market.
To empower consumers with the information – and means – to shop around for the best deal.
To drive home to suppliers that they can no longer overcharge people.
Not just because it’s wrong.
But also because if suppliers do, their customers will leave and their business will suffer.
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As I’ve just outlined, there is a lot wrong with the energy market.
But there are also promising signs that competition is starting to take root.
More people are switching from the largest energy suppliers to cheaper fixed tariff deals offered by independent suppliers.
The market share of independent suppliers has now risen to almost 14 per cent, compared to 1 per cent just four years ago.
More people are using price comparison websites to shop around and we want them to play an even bigger role in driving switching rates.
It’s getting faster to switch too. Most households now change supplier in a fortnight. Two years ago it typically would have taken three weeks.
Ofgem is working with the industry and government to allow consumers to switch suppliers much more quickly by the end of the decade.
There are signs that the largest suppliers are starting to get their act together on customer service.
The number of complaints they received in the last quarter of last year is down by about a third compared to two years ago.
The roll out of smart meters, which begins this summer, will help empower consumers.
They will bring an end to estimated bills. And if suppliers get the roll out right, smart meters will make it easier for households to engage in the market.
We at Ofgem want to work with the industry to build on this foundation by implementing the CMA’s remedies as soon as possible.
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When we talk about the lack of competition in the energy market, information is rarely mentioned.
But the information asymmetry – apologies for using economists’ jargon – goes to the heart of the problem and the CMA’s remedies to fix it.
Many of the customers on the most expensive standard variable tariffs don’t know they are being overcharged.
Even those who do may not realise they can switch supplier. And that the switching process is largely painless too.
So the bigger suppliers hold nearly all the cards.
Not only are they charging millions of households over the odds.
But they are also the only ones who know – literally – who these customers are and where they live.
We need to level the playing field by empowering consumers with the knowledge they need to make informed choices.
So that suppliers no longer take them for granted but treat them as valued consumers who will go elsewhere if they do not get a better deal.
One way to do this is by sharing data.
The CMA has proposed setting up a database of customers who have been on a standard variable tariff for at least three years.
The idea is to allow other suppliers to market cheaper deals to these people.
The names and addresses of these customers on standard variable tariffs would no longer be suppliers’ closely guarded secret.
This information, as well as how much electricity and gas these households use, will be shared with other suppliers so they can offer them better deals.
Clearly there will need to be safeguards on data privacy and to make sure households are not overwhelmed by mailshots.
Ofgem, which will run the database, is talking to the CMA and Information Commissioner about how to do this.
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We need to be realistic about what competition can achieve.
Parts of the energy market may need more direct intervention.
Take pre-payment meters.
The 4 million households on pre-payment meters are typically more vulnerable.
Yet the cheapest deals on the market aren’t available on pre-payment meters.
With many stuck on these meters because they are in debt, those most in need are denied the benefits of competition.
I’m particularly alarmed that they are even worse off than they were a year ago.
While we have seen direct debit deals get much cheaper, tariffs for those stuck on pre-payment meters have barely fallen and are now over £300 a year more expensive than the cheapest deals.
The CMA has recommended that these pre-payment customers are put on a temporary so-called “safeguard cap”, which will save them an estimated £80 a year.
So while we agree that more competition is the best way of fixing the energy market, sometimes more regulation – even if it’s temporary - is needed to protect the most vulnerable.
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Getting this balance right between competition and regulation is a tough call.
The energy market is no different.
Too much regulation stifles competition. This ultimately is bad for consumers, because costs – and prices – are higher as a result.
Companies also innovate less, which means consumers have fewer products, like tariffs, to choose from.
But if there is competition without strong regulation, consumers aren’t protected.
They get a bad deal, which feeds mistrust of the industry and often results in a regulatory backlash.
It’s certainly been the story of the energy industry over the past decade.
Energy companies complain that there is now too much regulation today.
I agree.
The rules have grown steadily over the last decade.
The licence conditions suppliers must meet are almost 500 pages long.
This makes it especially hard for new entrants, who have fewer resources, to operate and grow.
Now, we did not introduce all these new rules for the sake of it.
We had good reason to. Energy companies may complain about over-regulation, but they need to look in the mirror.
Some suppliers’ treatment of customers over the last decade has been sufficiently poor that Ofgem had no choice but to intervene: mis-selling, bad complaints handling, unfair charges. The list goes on.
We – both Ofgem and the industry – can’t go on like this.
We can’t keep adding rules to catch misdemeanours, only for suppliers to then find another loophole to mistreat consumers, in a never-ending game of cat and mouse.
So we are going to start again.
As regulator, we will rely more on principles, rather than an unwieldy rule book, to achieve better outcomes for consumers.
It will put more onus on suppliers to work out how to do this.
We will end the box-ticking culture and instead expect suppliers to grow up.
To act as responsible businesses providing an essential service who put their customers first.
We have already introduced a principle requiring suppliers to treat their customers fairly.
In December npower had to pay a £26 million penalty for failing to do this.
Last week Scottish Power also had to pay out £18 million for similarly shoddy service.
So any supplier who thinks regulating more using principles amounts to light touch regulation would be sorely mistaken.
We will protect consumers even more strongly than before.
And we will also allow suppliers more freedom to innovate and provide better deals and services to consumers.
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One example of this change in approach is the removal of Ofgem’s rule which prevents suppliers from offering more than four tariffs to consumers.
The CMA has said that the rule restricts competition and choice for consumers.
We accept this. We want consumers to enjoy the benefits of a wider range of tariffs as soon as possible.
So we’ve decided that from now on enforcing this rule is not a priority while we take steps to formally remove it.
Following the CMA’s recommendation, we will also be introducing a new principle requiring suppliers to make sure that any new tariffs they introduce are not misleading.
Acting promptly shows our commitment both to implementing all the CMA’s remedies and our new approach to regulation.
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There is no silver bullet to fix the energy market.
But the CMA remedies, combined with smart meters and the stirrings of proper competition in the market, provide an opportunity to transform the energy market and give consumers a new, better deal.
It’s a narrow window of opportunity.
The database and the safeguard tariff for pre-payment meters customers are only in place until 2020.
This is when the nationwide smart meter roll-out programme is due to be completed, making it easier for consumers – especially those currently stuck on pre-payment meters - to engage in the energy market and switch supplier.
By this stage, we expect competition to be hard wired into the market.
So what does a competitive market look like?
We expect suppliers to compete to keep their existing customers just as much as they do to win new ones.
That means passing on any falls in wholesale energy costs to all their customers – new and old - just as quickly as they pass on increases in costs.
Because suppliers know that if they keep taking customers for granted, they will walk away.
We also want people to get the customer service they deserve.
Ofgem plans to publish a new user friendly performance rating for suppliers to help people compare their customer service.
We expect this trust barometer to force suppliers to raise their game.
Because on customer service, as with price, suppliers know that if they don’t deliver, people will vote with their feet.
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Not everyone will trust their energy supplier.
The phrase “caveat emptor” comes to mind.
What is more important is that people trust the energy system.
So even if a supplier lets them down, they know the system won’t.
This means that customers have the information available to get the best deal and can take action by switching supplier.
In a trusted energy system, if things go wrong, when you make a complaint they are put right.
There is a proper framework to make sure consistently poor service is rooted out, and if necessary, penalised.
Now, the energy market is never going to be perfect.
Not everyone is going to switch supplier to get the cheapest deal.
We can’t force people to shop around if they don’t want to.
But we can make sure consumers are able to make informed choices about their energy.
And as a regulator, we will take action against suppliers who don’t treat their customers fairly.
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Energy companies have a responsibility to make competition work. It’s also in their interest.
We only get one shot at this.
Because if in five years Edelman’s annual trust barometer is as poor for our industry as today’s, a new approach may be required.
There’s only so much regulators can do to promote competition.
If competition does not work this time, then calls for more regulation – namely the fixing of electricity and gas prices for homes and businesses – as well as more government intervention will be much harder to resist in the future.
The safeguard tariff for pre-payment customers is itself a limited and temporary form of price regulation.
The CMA had originally proposed imposing this safeguard tariff much more widely, to the 70 per cent of consumers who are on standard variable tariffs.
Now, I hope we don’t have to resort to more price regulation in the future.
I believe that consumers are served best by a properly functioning competitive market.
Competition – with proper protection for the most vulnerable – is the best way to restore trust.
But energy suppliers have to earn that trust. Now is their chance."