Millions of people could see their energy bills slashed under proposals put forward by the competition watchdog.
A preliminary report into the gas and electricity sector by the Competition and Markets Authority (CMA) says there should be a price cap for those households that use pre-paid meters.
There are about four million homes that use pre-pay meters. As well as typically being poorer, many of these customers are likely to find it harder to choose more competitive accounts. They might not have bank accounts and the ability set up a direct debit, for example.
The CMA report says: “Although competition has benefited those customers who have switched to competitively-priced fixed-term deals, around 70% of the domestic customers of the six largest energy firms are still on the more expensive ‘default’ standard variable tariff.
“[Our] latest analysis reveals that the potential savings for these customers have risen substantially over the past two years so that the average customer could save over £300 by switching to a cheaper deal.
“[Our] analysis also shows that, in total, customers could have been paying about £1.7bn a year more than they would in a competitive market.”
Amongst the other proposals in the report is a database of customers who have been on standard tariffs for three years. The database would be maintained by Ofgem, the energy regulator, and rival providers would have access to the information, allowing them to contact these households and offer them more competitive deals.
There is also a proposal to remove the rule that states providers can offer no more than four tariffs each – a rule that the CMA says limits competition and innovation.
Roger Witcomb, chairman of the CMA’s investigation panel, said the authority’s aim was to extend the benefits of a competitive market to groups who were currently losing out.
“We have found that the six largest suppliers have learned to take many of their existing domestic customers – some 70% of whom are on ‘default’ standard-variable tariffs – for granted, not just over prices but with their service and quality,” he said.
“Yet in those parts of the retail markets where competition is working, customers are benefiting to the tune of hundreds of pounds a year by switching.
“We’re proposing a wide range of bold, innovative measures to enable competition to grow further across the market so that millions more households will benefit.
“For customers on pre-payment 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 four million households, whose cheapest tariffs are around £300 more expensive than for other customers.”
Ben Wilson, of price-comparison website Gocompare, said: “The CMA is right to consider more drastic action as the consumers that haven’t switched so far are going to need a lot more support and encouragement to find a better deal.
“The price war that has brought energy costs down dramatically in the last couple of years, stimulated largely by the new providers in the market, has passed many households by.
“From our own research, 43% of households have switched energy provider in the last three years but 57% haven’t, with almost a third saying they have never switched.
“As a result, we now have a two-speed energy market with an informed and confident minority using comparison sites to switch energy provider, while the majority of households either aren’t aware of the potential savings or aren’t confident enough to switch.”
There have been various investigations into the domestic-energy market over the years, but Ofgem has been considered by some critics as being not tough enough on the industry. Critics will be hoping that this CMA investigation – which has taken 18 months – will be more effective.