A year ago Associate Maxine Frerk published a report “It’s a Lottery” setting out how Ofgem’s price cap was failing to protect the 3 million or so customers on Economy 7 tariffs. In this blog, she explains why regulator Ofgem still needs urgently to carry out a full review of this part of the market; Ofgem also need to respond to the findings in the report. 

By giving suppliers flexibility in how they set relative day and night rates there is significant room for suppliers to game the rules – to the detriment of some of the most vulnerable customers. I thought Ofgem had got the message but this weekend the Guardian has highlighted the plight of EDF customers who have seen a 91% increase in their night rate – just at the time of year when they are most dependent on their night storage heaters (and hence night usage will be at its highest).

The price cap requires the weighted average price to be below the cap for a national annual average day-night split of 58-42. But, of course, the actual split will vary by supplier, by region and over the year – giving suppliers scope to beat the cap in practice. In winter when night time usage will on average account for a higher proportion, the supplier can gain by putting up night rates and reducing day rates, while still complying with the Ofgem formula. Just what EDF have done.

Insufficient data

Part of the explanation is that EDF did previously have by far the lowest night rates in some regions – as I flagged in my post a year ago – so they are to some extent just moving back into line with other suppliers. However, the timing feels pretty cynical.

Part of the problem is that Ofgem does not have the data to really understand what is going on in this part of the market and they have admitted that they have no evidence on how that 58-42 split varies across customers or across the year. Economy 7 is only a very basic time of use tariff so this bodes ill for Ofgem’s ability to effectively regulate a future market where many more of us have more complex time of use tariffs.

One of the concerns I had a year ago was customers on Economy 7 who no longer had night storage heating and for whom Economy 7 was not the right tariff – who could actually be hundreds of pounds out of pocket (exacerbated by the very large day-night differentials that EDF had at that time). To me this was a breach of the “treating customers fairly” licence condition and the requirement to ensure that customers are on a tariff that is appropriate for their needs. Although nothing has been published on this, my understanding is that Ofgem were at least asking questions of suppliers to ensure they were more alert to this issue.

But if a proportion of customers for whom Economy 7 is not suitable have moved off it then the usage of the remaining customers will be more heavily weighted to night time and the incentive for EDF to offer low night rates disappears. 

What Ofgem needed to do was look at setting the price cap to reflect the individual supplier’s actual day-night split rather than the national annual average (from 2017) – and to look at quarterly patterns as well. But without the data Ofgem have clearly struggled.  There’s probably less variability in tariffs across regions and payment methods now as a result of the report shining a light on the issue but I’d still maintain that the price cap fails to protect these customers, who are typically disengaged and have fewer options open to them.

In particular, the other point made in the report was that Ofgem’s calculation of the price cap for Economy 7 assumes that the wholesale unit cost of energy is the same whether customers are on a standard tariff or Economy 7. It should be obvious to anyone in the energy sector that energy is cheaper at night (when supply exceeds demand) – and hence customers with higher night time usage will have a lower cost to serve on average. At the time I estimated this meant Economy 7 customers were being over-charged by around £100 pa. The comparison that is made in the Guardian article with EV tariffs reinforces my view that the Economy 7 price cap is set too high.

For EDF customers on Economy 7 this is not an argument about formulae and economics but a real source of stress at the time when people are most worried about heating their homes. I’ve actually been contacted by someone on Economy 7 with EDF who uses 84% of their electricity at night and for whom the EDF change therefore has a massive impact. Ofgem’s response to this customer was they just set the price cap – the actual prices charged are a commercial decision for the supplier. (Or in full - “it is not Ofgem’s statutory role to dictate the prices suppliers charge, nor any tariff entry criteria they wish to apply, nor the types of tariff on offer. These are commercial decisions that suppliers must make themselves”).

Ofgem should not be able to simply wash its hands of this issue in this way. The price cap was introduced to protect customers who are not being protected by the market and it is failing to do that for the 3 million households on Economy 7. Ofgem needs urgently to carry out a full review of this part of the market and how it is dealt with under the price cap. My report set out the agenda and it demands a response.