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Ed Davey’s plan for cheap energy – What will it mean?

Energy secretary Ed Davey will announce plans to cut the number of tariffs available and automatically switch customers to the cheapest deal.

In a surprise move Mr Davey is expected to put forward plans aimed at simplifying the energy market by reducing the number of tariffs to just four per supplier. He will then require the suppliers to put their customers on the cheapest ‘suitable’ tariff for them, unless the customer opts out.

The proposal follows the Prime Minister’s announcement last month, when the energy industry was taken by surprise as he revealed: “I can announce that we will be legislating so that energy companies have to give the lowest tariff to their customers.”

Although Cameron’s statement appeared to be met with confusion and backtracking from the Conservative party, Mr Davey’s proposals seem to be following through on the promise.

The scheme could come into force as early as 2014, but is likely to be heavily scrutinized across the industry for its details, with some already pointing out that fewer tariffs may not mean cheaper tariffs – and could dampen competition. Mr Davey is expected to provide further details when he speaks at Parliament’s energy select committee later today.

‘Cheapest deal in an uncompetitive market’

Following the recent round of price rises, which have added £753 million onto household bills and pushed the average annual bill to a record high of £1,334, the government is under increasing pressure to act. Many see tariff simplification as the key to creating a more transparent energy market.

There are currently hundreds of tariffs available and the difference between the cheapest and the most expensive tariff stands at £300. An estimated 40% of households have never switched their supplier and many consumers are stuck on ‘standard’ tariffs, which are often the most expensive.

The energy market has also been recently hit by allegations that energy suppliers have been manipulating wholesale gas prices, with an investigation currently underway.

Ahead of Mr Davey’s announcement the the shadow energy secretary Caroline Flint said:

“Over a month ago David Cameron promised to force the energy companies to put all customers on the cheapest tariff, but since then millions of families have seen their bills go up. The cheapest deal in an uncompetitive market will still not be a good deal”.

“Unless David Cameron stands up to vested interests in the energy market and creates a tough new watchdog with powers to force energy companies to pass on price cuts his warm words will be cold comfort to people worried about paying their fuel bill this winter,” she said.

What could the plans mean?

Mr Davey’s plans follow proposals by the energy regulator Ofgem to simplify tariffs.

These include banning tariffs charging different prices dependent on usage, and ensuring households are put on the cheapest plan at the end of a fixed-term contract. Speaking on the Today programme Angela Knight, the head of Energy UK admitted that suppliers ‘were expecting some of this’ following Ofgem’s recent proposals.

But Mr Davey wants to go a step further by having just four tariffs and requiring companies to put customers on the cheapest one. This could mean (for instance) one variable tariff, one fixed, one prepayment and one Economy 7 tariff. However, the presence of different payment options such as cheque or direct debit, and different meter types will still lead to a variety of prices.

There are also questions about whether the proposals will make the market more competitive. Fewer tariffs could lead to greater transparency, but the overall price of tariffs could go up if suppliers are forced to limit the tariffs options.

Commenting on the plans, BBC deputy political editor James Landale said: “The real test will be whether people actually see smaller bills at a time when energy prices are rising.”

What we say

Tom Lyon, energy expert at uSwitch, says: “Simplifying tariffs and the market for consumers is a good thing. Giving consumers all the tools they need to select the best deal for their needs will give competition the kiss of life that it needs. New suppliers, such as Co-op Energy are already offering simple and clear tariffs so it would be good to see the big six following suit.

“We also welcome moves to encourage suppliers to tell consumers about their cheapest deals and the behaviour required to benefit, such as paying by direct debit and going online, especially if it opens consumers’ eyes to the fact that there are better deals and options out there.

“There are some straightforward wins for consumers in these proposals, but there are also some crinkles that will need to be ironed out. We’re glad that the Government is now consulting on these proposals as they will have far-reaching implications for consumers and the competitive market so it’s vital that it gets them right.”

What do you think?

Do you think the government’s plans are a good idea? Share your thoughts in our comment section below.