Customers need remedies that address causes, not symptoms

In the coming months the CMA will be mulling over the final stages of its investigation into the energy market and, following its initial diagnosis, is giving more detailed thought to which interventions, or ‘remedies’ might be necessary to address any issues it has identified. Indeed, it has recently announced an extension to the timeline to enable it to carry out more thorough analysis. This represents a unique opportunity to ensure that we have a market which not only works for customers but is also seen and trusted to do so. But if the remedies only focus on the symptoms, rather than the underlying causes, it could be an opportunity missed.
 
As the investigation has progressed, the focus has moved increasingly on to the subject of customer engagement. Naturally, this has led to much scrutiny over levels of switching in the industry as a proxy for engagement. While we believe this leads to an overly simplistic view of engagement and that many customers who don’t switch are still engaged, clearly it is a useful indicator for consideration.
 
In that context, one of the most interesting pieces of work the CMA has undertaken is a customer engagement survey: a comprehensive analysis of around 7,000 customers intended to really probe their behaviour. Specifically, it looks at what makes customers switch and what are the barriers (perceived or real) that reduce any appetite for switching. There are some very interesting findings within it, including that switching levels – in fact – compare well with other markets. Some 27% of customers have switched energy supplier in the last three years, which is higher than many other markets, including the mobile phone market where 24% of customers have switched.
 
However, a closer look reveals more about the real root causes for low switching levels among certain groups. For example, many people assume that factors like age, income or vulnerability are in themselves keys barriers to engaging in the market – but an in-depth study of the CMA’s actual customer survey, undertaken by Frontier Economics on our behalf, reveals a number of other factors which appear to have a more direct bearing on a customer’s propensity to switch.

The results indicate that the main drivers of customer switching are internet access, not being in receipt of Warm Home Discount (WHD) rebates and supplier contact. By contrast, socio-economic and demographic characteristics have little or no identifiable effect after controlling for these factors. The only clear exception is household tenure type, which does appear to influence propensity to switch. However, the evidence does not suggest that social housing renters are less likely to switch than private renters.
 
The most prominent finding – statistically significant on all of the switching measures we looked at – is that internet access is a key enabler of switching. Price Comparison Websites have revolutionised the way customers hunt for the best deals in the market and Frontier found that internet access is the biggest driver of engagement in the CMA survey.

Controlling for socioeconomic and demographic characteristics, customers with no internet access are on average 12-15 percentage points less likely to have ever switched supplier, and 6-12 percentage points less likely to have switched recently. This is substantially larger than the marginal effect of old age or low income, for example.
 
Customers without internet access are also 6-12 percentage points less likely to be confident in their ability to switch and 17 percentage points less likely to switch in the next three years. Internet access is the only variable that has a statistically significant effect on all the measures of switching and confidence that we tested. To put this in context, the other variables that we tested included age, income, qualification and measures of vulnerability such as access to the Priority Service Register.

Meanwhile another three influential variables came to the fore. Contact from suppliers increased customers’ propensity to switch by 15 percentage points. Analysis of tenure type showed that customers in both social housing and private rental properties were 11-16 percentage points less likely to switch than customers who owned their homes. However, renters were no less likely to feel confident about their ability to switch, suggesting that this may stem from the nature of rental contracts. Customers who receive WHD were 7-10 percentage points less likely to switch supplier, but were likewise no less likely to feel confident about their ability to make the right choice. One reason could be concern of losing the WHD benefit, since suppliers with fewer than 250,000 customers are not obliged to provide it.  
 
We recognise that the energy sector has to take the lead when it comes to driving increased customer engagement but behind the headlines the CMA research does point to the fact that some of the issues run a little deeper and these findings seem to be aligned with many of the experiences of respected organisations who work with vulnerable customers.  While suppliers such as SSE can offer competitive broadband deals to customers, clearly Government also has a central role to play in ensuring that internet connectivity extends from Arran to Portsmouth. One of the many appealing parts of the new initiative from Citizens Advice to provide a personal switching service is that includes face to face advice and would actually address an underlying cause: lack of internet access.
 
Similarly, government could use its own policy levers to ensure that no private tenant is prevented from switching by a rental agreement. It could also make the Warm Home Discount available across all suppliers which could open up a new frontier of possible suppliers for eligible customers.
 
The refreshing thing about this analysis is that it helps point to possible remedies which would not only reflect the diagnosis, but also look beyond the symptoms to treat the underlying causes. With the coming months critical in defining the future of our energy market, we have to make sure that interventions aren’t made for their own sake but are well-targeted to areas where they will help make a real difference.

About the author

Dr Richard Westoby Director of Retail Economics

Richard Westoby was an Economic Advisor with the Department of Energy and a Senior Economist at British Gas before joining the Electricity Industry in 1989. He is currently SSE’s Director of Retail Economics where his responsibilities include pricing, forecasting, business intelligence and aspects of smart metering and fuel poverty policy.

Read more articles by Dr Richard Westoby