Whilst we believe the energy market is delivering against many measures, we recognise there is a clear need to build on existing initiatives to ensure all customers feel confident in the market place.

2. An "Honest Conversation" about energy prices

A February 2012 survey for Ofgem noted that "[consumer] engagement [is] shaped by two key factors:  Level of energy literacy; and a belief that worthwhile savings can be made from switching" [12] [13].  Price is "overwhelmingly" the primary reason for switching. [13] [14]  British Gas believes that rising prices are the primary reason that consumer concern over the energy market has increased.

Perceptions that the sector is "profiteering" due to higher prices are unjustified and undermine trust in the market place [14] [15]

We are concerned that consumer nervousness over profiteering will only increase as the unit cost of energy rises. According to Ofgem, the unit cost of energy could rise by between 23% and 52% by 2020. A Populus opinion poll found that only one third of respondents were willing to pay an additional GBP100 to ensure energy security and lower carbon emissions. Just 1% would pay an extra GBP500 [15] [16]. 

All parties should do more to ensure that the debate is framed around why prices are rising and what steps can be taken to mitigate this.

British Gas has begun some work explaining energy pricing to customers. Last year, we wrote to all customers checking they were on the right tariff for their needs and promoting free energy efficiency. We conducted a national advertising campaign addressing why prices were rising. And we placed a breakdown of costs on the energy bill, showing that just 5% of the bill represents supply profit. British Gas is currently developing an external cost tracker to help customers understand the drivers of price changes. We would welcome the chance to work constructively with this Committee on other engagement opportunities.

Care must also be taken to limit the costs of policy on the consumer bill in the first place.  If social and environmental policies such as Electricity Market Reform and the Energy Company Obligation are to be recovered through a levy on the bill, all parties must be honest about the true cost of that support, why it is needed and why general taxation is not a more progressive means of collecting the cost. 

3. Ensuring accurate bills

Estimated bills were the number one issue raised by British Gas’s Consumer Panel. Customers dislike the fact they can lead to price shocks when bills are readjusted [16] [17].

Government must continue to move forward with the smart meter rollout to ensure all customers receive accurate billing, as estimated bills are a fundamental building block for energy market engagement.

Smart meters are essential for accurate billing, but how the bill is presented is also important in helping customers engage.  British Gas’ bill has received high marks from both Consumer Focus and Ofgem for clarity. Internal research from August 2010 also suggests that 8 in 10 customers agree that their bill is easy to understand.  

Nevertheless, we agree with Ipsos Mori’s findings that: "many standard energy market terms are not well understood [such as] tariff, kWh, fixed, standard, standing charge, two-tiered pricing and estimates."  Much of this language is regulated and means little to consumers. [17] [18] We have added a web tool to support customers in decoding this language: http://www.britishgas.co.uk/business/manage-account/Howtoreadmybill. 

Ofgem should work with industry and consumer groups to find clear, easily understood phrases to explain all the relevant parts of the bill.

Customers have also told us that too much information can be as great a barrier as too little. Ofgem must use the opportunity of RMR to rationalise regulated information.

British Gas is conducting a large-scale research project to fundamentally reorganise billing, and will be presenting Ofgem with ideas shortly.

4. Enabling customer choice through simpler and more transparent tariff structures

In November 2011, British Gas simplified our tariffs to two types: variable and fixed. Customers now go through a three-step process, choosing whether they would like a variable or fixed tariff, paper or online bills, and how they would like to pay. British Gas internal research has shown that "83% of customer found the new tariff structure good, very good or excellent. Only 6% did not support the changes." We have also stopped offering loss leaders, to ensure we better serve existing customers. 

Customers have access to a simple document or online tool, showing the costs, benefits and fees associated with each tariff. We will build on this work by offering a simple metric shown on annual statements to help customers compare prices across tariffs

British Gas recognises there is an opportunity to simplify tariffs further. We, nevertheless, have serious concerns however that Ofgem’s current proposals to in this area [18] [19] will actually decrease in customer engagement and increase customer bills. 

We have instead proposed to Ofgem a series of remedies which would significantly improve customer engagement with the energy industry.  Specifically Ofgem should:

· Require all suppliers to adopt pricing structures that are based on a "standing charge" and "single unit rate" format – and ensure that any restriction on the number of tariffs suppliers are permitted to offer customers strikes an appropriate balance between choice and simplicity;

· standardise the way in which suppliers offer discounts to customers on tariffs; and

· introduce new obligations on suppliers to provide additional tariff information in a standardised way (both a price comparator metric, and a tariff information label).

5. Ofgem’s Retail Market Review (RMR) proposals: our concerns

Ofgem have recently published their proposals to improve customer engagement in the energy market. We do not believe the case for this is strong, as we have set out above.

We are deeply concerned that Ofgem’s proposals sacrifice choice for clarity in a way which is unhelpful and expensive for the consumer:

The RMR suggests that:   

· Suppliers will be restricted to one standard (variable) tariff per payment type

· Suppliers will no longer be allowed to give consumers discounts for these standard tariffs, even where these reflect cost savings (e.g. dual fuel discounts, or discounts for paperless billing).  Consumers will be required to sign up to a fixed term contract to obtain these discounts. Removing these discounts could cost £75 per customer per annum.

· Because just one standard tariff is allowed, tariffs that encourage demand side response (time of use tariffs) will be banned, as well as specific "green" tariffs unless customers sign up to a fixed term contract.

· A standing charge would be set by Ofgem for standard tariffs, with suppliers able to change only the unit price.  Suppliers would not be able to offer lower standing charges to customers who would prefer this (e.g. lower volume consumers).

· All other tariffs would be fixed term.  Unlike standard tariffs, there will be no restrictions on the number of fixed price tariffs a supplier can offer, nor the duration or type of fixed plan that they offer.

These proposals represent a radical and disproportionate intervention in the retail market, unjustified by the evidence presented.  At a time when regulators in other countries and sectors are looking to increase the ability of competition to deliver benefits to consumers, Ofgem’s proposals will abolish some of the UK’s most important innovations.

Our research shows that:   

· Once customers understand that Fixed Term Contracts (FTCs) may result in termination fees (for leaving the contract early), only 28% of customers have a preference for FTCs.

· interest in online, dual fuel discounts, time of use and green tariffs falls by 50% if customers are told they require a FTC to get them

· twice as many customers would prefer suppliers to be able to offer existing discounts and propositions on all tariffs. It is therefore highly likely that driving more customers towards FTCs will reduce switching (particularly given the unpopularity of termination fees). Ofgem notes that: "the removal of dual fuel ‘discounts’ from standard tariffs carries a risk of frustrating a significant number of consumers and possibly hampering our attempts to promote engagement."

· 37% of customers would have a worse opinion of the energy industry if they need to move to FTCs in order to obtain the discounts they currently receive on more flexible contract types. 

· Vulnerable customers have less access to the data necessary to find a suitable fixed term contract, or negotiate the range of offers available in this part of the market, and are likely to be disproportionately impacted by these proposals. 

· Ofgem’s proposals are internally inconsistent.  They contend that their proposals will improve tariff comparability, and yet, if customers are to retain the range of discounts / choice they have today, they will need to choose from an increasingly wide and complex range of fixed term contracts.  If Ofgem had attempted to quantify the costs and benefits of their proposals, this inconsistency would have become apparent.

As Professor Stephen Littlechild argues, "There is no reason to believe that [Ofgem’s proposals] will encourage more customers to engage actively in the market…There is more reason to believe…the opposite… it would deprive customers of the option to choose standard tariffs with zero standing charges, online discounts and dual fuel discounts, and green tariffs…At a stroke the four most distinctive and customer‐valued tariff innovations since the introduction of retail competition would be banned… How can this be consistent with promoting competition and the interests of customers?" [19] [20]

Littlechild contends that consumers were most engaged with the APR style comparison metric – the introduction of which British Gas strong and proactively supports.

We recognise the need to bring tariff transparency to the market, but would urge the Committee to consider our remedies laid out above. These would avoid most of the unintended consequences and costs implicit in Ofgem’s core RMR proposals, delivering major improvements in tariff comparability without overly restricting choice from the tariff sector.  These changes would also preserve many of the main ways in which we encourage customer engagement today.

6. Engaging consumers on energy reduction

British Gas is the UK’s leading supplier of energy efficiency and decentralised energy. We are "going early" on the Government’s Green Deal, and have conducted a large amount of research in this area.

Energy efficiency can make dramatic changes to consumption and therefore bills.

· British Gas customers have cut their gas consumption by an average of 22% in the past five years – and saved £322 a year. [20] [21]

· The largest impacts on natural gas consumption come from insulating cavity walls (18.3% cut); installing an A-rated energy efficient boiler (18.0%) and by insulating lofts (13.8% cut).

· British Gas customers could save a further £3.6 billion over the next five years if they invest in energy efficiency measures.  

Customers do understand the value of energy efficiency, and interest has increased since the economic downturn:

· Customer research (September 2011) demonstrates that saving money is the primary motivation for engaging in energy efficiency: 84% highlighted tackling rising energy prices; 78% said to save money; 58% said cutting costs due to the recession and 43% highlighted environmental concerns.

Making these benefits tangible (especially cost savings) is critical if we are to engage consumers on energy efficiency. This is another reason why British Gas strongly supports the introduction of smart meters, as it will allow consumers to fully understand how they use energy, and therefore how they save it

It is also important that the Government has a thoughtful consumer engagement strategy around the Green Deal in particular, as our research suggests insulation alone is considered too boring – and with too much hassle factor – to engage many consumers.

Government can help to drive consumer demand for the Green Deal through ensuring a wide range of measures are covered, allowing blended financing, and supporting a range of fiscal and regulatory drivers including stamp duty rebates and bringing forward minimum standards in private rented properties from 2016.

Microgeneration and renewable heating systems will be a key driver of demand for the Green Deal, and these should be fully financeable under a Green Deal.

Every opportunity to engage with customers should be taken. Suppliers should be able to promote the Green Deal and offer to arrange assessor appointments when they are in the home installing smart meters, which will act as a catalyst for consumer behavioural change.

British Gas supports the Energy Company Obligation, which will link to the Green Deal, in order to support the most vulnerable householders, and the hardest to treat homes. To maximise the identification of eligible households, and to reduce search costs and deliver the programme as cost effectively as possible, we would welcome the early expansion of data-sharing to allow us to directly make offers to eligible households, and to increase the use of referrals from trusted parties such as the NHS. 

March 2012