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Will energy market reforms cause cheapest deals to ‘disappear’?

Govt admits that some consumers’ energy bills will go up

money in changeThe coalition’s long-awaited energy market reforms may result in some consumers’ energy bills going up, the government has admitted.

In a bid to make the market more transparent and fair, the government has backed a new strategy by energy industry regulator Ofgem that will see the number of core tariffs offered by each energy company reduced to four.

Families who are on so-called “dead” tariffs that are no longer offered to new customers will also be transferred to better deals, and an easy-to-use tariff comparison system will be introduced so that consumers have a better idea of how they can save money by switching supplier.

The government is aiming to reduce the confusion over which tariffs are the most competitive and give families a better deal, but analysts say it could result in many consumers losing out as energy suppliers can no longer afford to offer the best possible deals.

Distributional benefits

Now, the coalition has admitted that there could be ‘distributional benefits’ to consumers, with an impact assessment by the Department for Energy and Climate Change (DECC) suggesting that the more vulnerable in society, who are less likely to switch and more likely to be on poor-value, dead tariffs, will benefit.

However, this may be at the expense of those who shop around for the best tariff and switch regularly, the government concedes.

“This would be a transfer away from those presently active in the market who benefit from the very cheapest available tariffs at present, which may be less likely to be available when these measures take effect and more switching occurs,” the assessment states.

While the majority of people on standard tariffs stand to save an average of around £34 a year when the reforms are brought in, analysts estimate that the quarter of consumers who regularly switch supplier could see their bills rise by £100.

The DECC has defended the move, saying the reforms will lead to a “fairer and more efficient market” when implemented.

“We must strike a balance between ensuring all consumers – including the majority that currently don’t switch – are on the cheapest tariff for them, and maintaining competitive pressures on suppliers to compete and innovate to offer attractive deals to consumers.”

Paying the price

However, shadow energy secretary Caroline Flint, a long-time critic of the reforms, argued that most people will not see their energy bills cut at all, while those whose bills rise will be paying the price for finding the best deals in the past.

“You don’t need a PhD in economics to work out what will happen – the cheapest deals in the market will disappear,” she commented.

“The government should instead introduce single-unit prices for energy tariffs so people can easily compare prices and spot the best deal for them at a glance. This would inject much needed competition into the broken energy market and finally increase the pressure on energy companies to keep their prices as low as possible.”

The coalition remains resolute in its intention to implement the reforms and David Cameron has said the coalition will back Ofgem as it rolls out the new regulations, which will impact millions of consumers across the UK, for better or worse.