7 minutes reading time (1426 words)

The consumer lived experience in energy and water

Guest Blog from Richard Hall, Chief Energy Economist, Citizens Advice

To go alongside our recent Fair for the Future Project working note on 'Changes in the consumer lived experience in regard to fairness and the environment', Rich has shared his perspective from Citizens Advice.

We live in uncertain times.Some basic assumptions about how society does and will develop have started to break down.Historically Brits have grown up used to the idea that, excluding times of war, each generation will be more affluent and enjoy higher living standards than its predecessors.That the pace of change might vary, and there might be considerable variation around the median, but that progress was inevitable.That you'll have it easier than your parents, and that your kids will have it easier than you.

But while the UK has fared better than many of its international peers in responding to the global financial crisis, real wages have stagnated in the last decade.Getting on the property ladder is an increasingly unachievable dream for many.As many as one-in-nine households are in insecure work; a zero hours contract, agency work, or low paid self-employment.The transition to Universal Credit is proving problematic with many financially stretched families likely to lose money as a result.The gap between booming executive pay and the wages of median and lower earners is ever widening.Many people feel that the status quo is not working for them.This has driven a rise in populism on both the political left and right.The social and political contracts of the past are being rewritten.

In regulated sectors like energy and water, the tailwinds that existed at the time of liberalisation are now arguably past.The fat that existed in those sectors at the time of privatisation, such as overcapacity in power generation, has largely now been excised.The pattern of falling bills that characterised the first decade or so after the introduction of retail energy competition has been replaced by an era of largely static bills, with unit price inflation largely cancelling out units used deflation.The public may not feel like they are 'winning' from the current regulatory construct, as they cannot see the large jumps forward that they did in the early years of liberalisation.If the sectors are performing well on choice, price and quality of service, they may not get credit for this, as consumers aren't able to see the counterfactual and understand what differences might result from an alternative model.Political appetite for incremental change is being replaced by a desire for more radical reforms.This has already seen the re-introduction of retail price caps in energy, and the adoption of a renationalisation agenda in both energy and water from the Labour party.Whatever your views on the pros and cons of renationalisation, it must be noted that it consistently polls well with the public.It would be imprudent for regulated utilities not to regard it as a credible threat.

Consumers only spend a small amount of their time engaging with the energy and water sectors.They are asked to actively engaged in an ever increasing range of markets if they are to have any hope of getting a good deal.Citizens Advice has estimated that households could be losing nearly a thousand pounds a year by failing to shop around in five key markets.This prompted a super complaint to the Competition and Markets Authority ('CMA') about the impact of the 'loyalty penalty.'The CMA's response suggests it recognises and largely agrees with its substance.While the super complaint does not cover the energy and water sector, it covers a range of other essential services and may shape the wider regulatory landscape in the coming years.And there is considerable thematic overlap in the issues it is addressing around consumers ability to navigate with and benefit from fractured retail markets where they are overloaded with information.

A major uncertainty here for all involved is perceptions of fairness.The case for intervention into regulated (or, indeed, unregulated) markets is usually founded on a view that the way in which they are currently operating results in unfair outcomes for consumers or citizens.But there is no commonly agreed narrative on what fairness is.This makes it hard for all involved to understand what the 'rules of the game' are.So, for example, there are no set criteria on which the decision on whether or not to remove the energy price cap will be made.Whether you like the cap or hate it, this creates real uncertainty on when it will be removed.When nobody knows 'what success looks like', medium and long term planning becomes very difficult.

Fairness issues are exacerbated by the pace and nature of change, particularly in the energy sector.For example, investments in new technologies such as electric vehicles and micro-generation and storage may necessitate network reinforcement.Yet the early adopters of these technologies may be the more affluent, and a by product of their adoption may be a reduction in their exposure to network costs.If not tackled by intelligent policy design, this could result in cross subsidies flowing from the poor to the rich.

Utility companies have a role to play in debates around cross subsidy and fairness.While monopoly networks may be able to recoup their allowed costs no matter which consumers they are allocated to, the perceived fairness of cost allocation may greatly influence public mood and confidence in the regulatory contract.Anticipating problems and getting ahead of the public debate may help them to de-risk their businesses while winning public confidence.

Decisions around access and choice will also influence consumer politics.If we want to bring energy and water consumers along with us as these markets evolve, then we need to make it easy for them to understand their options and to access services.It is important that utilities never lose sight of the fact that they are providing a universal, essential service.Because of this, innovations that only serve some consumers will be exposed to different politics in this arena than might be the case if they emerged in non-essential products.For example, the trend towards online only customer service provision that is prevalent in many sectors may not be as politically and socially acceptable here.While ignoring 'hard to serve' or costly to serve customers might make good commercial sense in many sectors, it is a recipe for awful public relations and political intervention in essential utilities.

Because of this, and being mindful of the prospect of the introduction of domestic retail competition into the water market, both sectors need to think about how they provide enduring support to consumers in vulnerable circumstances in a post price cap world.There is a need to develop a shared consensus across industry and its stakeholders on what form that should take.Ideally that conversation needs to go back to first principles rather than simply seek to evolve existing schemes, as some of these simply don't map well onto need or are difficult to implement due to problems in areas like data sharing. A good example of this is the Winter Fuel Payment, eligibility for which is simply based on age not income/ability to pay.One national newspaper (The Sunday Times) actively campaigned over the last winter for recipients to give the money to charity if they did not feel they needed it.

In energy, the sector needs to address the ghettoisation of the prepay market, which has been traditionally under-served.Smart meter rollout provides a real opportunity to improve service provision for that tranche of consumers that the industry needs to take if it is to renew its social licence to operate.So we also need a shared consensus about support for very vulnerable prepay users, and that needs to include moving them to credit terms in some cases.

In common with many other consumer markets there are a large number of tools emerging to try and help consumers get a better deal, whether on price or on service.The majority of these tools best serve those who are already tech literate, more confident in shopping around and who have the financial flexibility to enable them to take risks by switching providers or purchasing a new tool or service.Digital literacy and access may limit their wider application.Something that Citizens Advice has been considering is how to incentivise these new companies to target different types of households.We're carrying out some small scale trials with providers of apps and auto-switching services to see whether or how they could be made more accessible for households on lower incomes or where they have some form of vulnerability which might make engaging more challenging. It's an area where we're interested in doing more work in order to broaden the reach of these new style services.

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