Industry expert worried Ofgem proposals could lead to higher prices

Published:  22 October, 2012

An industry expert has questioned whether Ofgem’s proposals to force energy companies to offer fewer tariffs will actually lead to lower retail prices.

Dr Monica Giuletti, who has produced more than 30 papers on the energy industry and its pricing mechanisms, welcomed Ofgem’s efforts to simplify pricing for customers, but criticised its plan to limit each energy supplier to no more than four core tariffs for each fuel, saying it will actually lead to higher prices.

The Warwick Business School associate professor argues that Ofgem should concentrate its energies on breaking up the domination of the ‘Big Six’ and so allow independent retailers into the market.

“Many economists would agree that reducing the range of tariffs to only 'the lowest tariffs' would not necessarily provide benefits to all customers and will reduce the extent of competition,” said Giuletti.

“There is a lot of evidence that it is complicated to choose the right tariff and having clearer pricing would help, but it would be detrimental to put everyone onto a single tariff as the Prime Minister has suggested and even reducing it to four tariffs would not help to reduce energy bills.

“Only having a few tariffs would mean the energy companies will stick together and it would give them an opportunity for them to collude. In fact it is likely to lead to higher tariffs, because there are only six companies who dominate the wholesale market.

Giuletti has recently produced a study on pricing - Estimation of Search Frictions in the British Electricity Market – and believes pricing needs to be simplified, but the range of tariff choice kept in place.

“Based on our results we support Ofgem's policy of increasing transparency in the information provided by suppliers to customers and in particular about the tariffs on offer," she said.

“Having simple choices would help people finding better tariffs, but there are a lot of people that don’t engage in this so it wouldn’t help all consumers. Only a minority are prepared to make the effort, according to Ofgem it is only five to 10%."

About 30% of customers changed supplier without searching. In fact evidence suggested that around a quarter ended up on a worse tariff and only about 20% identified the ‘best deal’.