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OVO response to “Impact of measures introduced as part of the Retail Market Review and the Secure and Promote licence condition – voluntary call for evidence "

By Guy Newey Tuesday 02 June 2015

OVO Energy’s response to “Impact of measures introduced as part of the Retail Market Review and the Secure and Promote licence condition – voluntary call for evidence”

Domestic Retail Market Review

1. Do you consider that the domestic requirements rules have affected the level of innovation and / or the ability of domestic suppliers to differentiate in terms of:

a. The type of tariffs that they are able to offer?

RMR has had a chilling effect on innovation in the energy supply market. In particular, it has limited what tariffs we can offer. It has also restricted OVO’s ability to target underserved segments of the market, including prepayment customers. It has also hampered our progress in developing a community energy offer.

OVO set up a community energy offering a year ago in which OVO partners with local authorities and community groups to offer bespoke supply services. Under RMR rules, we have had to make lengthy and time consuming derogations which have added cost and uncertainty for both us and our prospective partners. For example, in order to offer tariffs to each of our three OVO Communities partners to date (Cheshire East, Peterborough and Southend) we have had to apply for individual derogations. Whilst we have welcomed the faster speed at which Ofgem has accepted these later derogations, and the fact that they have publicly encouraged suppliers to apply for derogations for vulnerable customers, the first application took more than 90 days to get a decision on. New white label rules will thankfully remove this burden, although it remains unclear why the four tariff rule should remain when white labels will be able to flourish unimpeded.

OVO launched its prepay offer a year ago, and has now introduced a smart prepay offer. However, we currently only offer one variable tariff to prepay customers (we previously offered a fixed deal). We only have one tariff because of restrictive rules around RMR. Because any prepay tariff has to be linked at a fixed discount to any of our four core tariffs, we cannot innovate. In our opinion, the prepay market is entirely separate to the credit market. The changing technology makes this even more significant, as the cost to serve is changing due to smart meters (and likely reducing). We would therefore like to be able to adjust our prepay tariff more regularly, or at least at a different frequency, when compared to our credit tariffs. However, under RMR rules, this is not possible. In short, we would be offering two, possibly three or four tariffs to prepayment customers, but RMR restrictions have limited us to one. As Ofgem has noted in the past, this is a part of the market that is woefully underserved.

As a result of the RMR tariff restrictions, we have seen other products withdrawn from the market that enabled suppliers to differentiate and offer more choice to consumers. These have included several green tariffs, zero standing charge tariffs and tariffs designed specifically for elderly customers. It is not clear if switching rates have been affected at all, and a very large percentage of customers remain on high standard variable tariffs, as the CMA investigation has noted.

It is worth stressing that RMR has not stopped the Big 6 incumbent suppliers putting out protective, potentially loss-leading tariffs. This remains the biggest barrier to expansion for independent suppliers. It has also not stopped the large suppliers overcharging loyal customers. Switching rates remain lower than the 2008 peak and it is not clear there has been an improvement in outcomes for consumers generally.

b. The number, content and formatting of supplier communications?

RMR rules have made our regular customer communications more lengthy and confusing. Our core value, and one of our key differentiators from competitors, has been simplicity. We work hard to make our customer communications as clear as possible and won a clear English award in recognition of this effort. However, our standard customer statement post-RMR changes is 2 pages longer than our standard customer statement pre-RMR changes (if you take out the annual statement page for a direct comparison). If you compare like for like pages, e.g. the “Your statement at a glance” (page 1 on the pre-RMR statement and page 2 on the post-RMR statement) there’s much less information on the pre-RMR statement and the key information (i.e. the actual statement) is on page 1. The post-RMR statement has mandatory information on the first page which many people won’t read past and so will never see the actual numbers. We are not convinced this has made life simpler for customers.

While we welcome the aim of Cheaper Tariff Messaging, the rules as currently designed do risk creating confusion for customers. Forcing us to describe cheaper deals to prepayment customers that they may not be able to switch to easily (especially if they are paying off debt) is not helpful. Moreover, if a customer is on a fixed one-year deal, there should not be an obligation to tell them they could get a cheaper one-year deal as the prices of our current one-year deal have dropped (to reflect changing wholesale market conditions). Our experience is that this has caused confusion and frustration among customers. This has also created problems for our OVO Communities tariff which are only offered in certain regions. It seems to us that this is one area where a principle-based approach could be more appropriate. The proscriptive rules do not recognise the subtleties of the market and can lead to poor customer experiences. This is discussed in more detail below.

Understanding and complying with the rules has been extremely onerous, particularly for a smaller supplier. It is not clear if this has provided any significant benefit for customers or for competition.

2. Are there areas where the domestic RMR requirements have caused negative unintended consequences? Where this is the case:

a. Which requirements in particular do you think have caused these?

As discussed above, we believe that the four tariff rules have restricted our ability to offer bespoke products for underserved customers and increased consumer confusion.

Under RMR rules, we are obligated to disclose Cheaper Tariff Messaging (CTM) to all customers. However, we feel that this requirement will increase confusion and is not appropriate for certain customers. Unlike the Big Six, around 75% of our customers are already on our cheapest tariff. When a customer signs up with us on a 12 month fixed tariff, we buy all their energy in advance for the year and offer the best price we are able to on the day they sign up. As a result, we reserve the right to charge a £30 fee if a customer wishes to “tariff hop” to a lower priced tariff. This doesn’t preclude them from leaving (we have no exit fees), or leaving and returning after 3 months to resign at whatever our cheapest deal is at that point. They can naturally re-fix onto our cheapest tariff from our Standard Variable Tariff (SVT) at any point.

As a result, being made to advertise CTM on our regular fixed statements the way we do on annual statements and on SVT statements creates several complexities, both for us and for the customer who would need to go back and reference the terms and conditions (unless we add these to the bill as well), then do the CTM calculation again adding the £30 fee. Of course the customer could choose to leave and return in 3 months, but we couldn’t guarantee the tariff they saw 3 months ago would still be available, or that it would be our cheapest tariff as we work hard to be cost reflective which means more frequent tariff changes than many suppliers.

RMR tariff restrictions also cause confusion to our PPM customers as we have to disclose cheaper deals to customers even if they are not available to PPM customers.

We agree in principle that customers should be encouraged to shop around and switch to cheaper deals where available. However in these cases the application of the precise rule leads to what we consider an adverse effect on customers. Again, this points to a principle-based approach, rather than prescriptive rules (including suppliers making it clear that the cheapest tariff only refers to their own tariffs, not all of the market tariffs).

Additionally, since July 2010 we had been paying out a 3% interest reward to direct debit customer accounts in credit. This was a unique offering in the market and was solely designed to benefit the customer. However in March 2014, Ofgem informed us that this went against a new licence condition as part of the new RMR regulations and we were instructed to remove the offer or apply for a derogation. We were pleased that Ofgem granted the derogation in this case, but the very fact that we had to apply for a derogation, which took 5 months to be accepted following our submission in August 2014, disincentivises suppliers such ourselves from offering new products in the first place.

b. Are there things you would have done differently without the RMR rules, and what are these?

  • As discussed above, we would currently be offering more tariffs in the market for prepayment customers without RMR rules.
  • Our bills would be shorter and, we think, clearer.
  • We would likely have introduced a social tariff. We proposed this idea as an alternative to RMR, however RMR rules make it much harder to introduce without a derogation.

c. What do you consider has been the impact of these unintended consequences for consumers?

  • We are less able to test what products work for which parts of the prepay market. There is less incentive therefore to drive down costs.
  • It initially slowed down our development of partnerships with local communities.
  • Consumers have been confused and frustrated by some of the cheaper tariff messaging and the information provided (both content and layout).

3. Do you consider that the domestic RMR requirements have been effective in improving consumers’ understanding and prompting engagement?

a. Which of the new comparison tools (ie Tariff Comparison Rate, Tariff Information Label, Personal Projection, Cheapest Tariff Messaging) have been most and least effective?

As discussed, above we think cheaper tariff messaging is well-intentioned and a very useful of reminding customers that they could be saving money. However, we think as currently designed it risks making things more confusing for customers, particularly those who have done the ‘right’ thing and switched on to a cheap one-year deal with a supplier. Being told they could be saving money elsewhere, even though that is not possible, is likely to increase disengagement.

We remain sceptical of the model that underlines RMR that suggests that more information on a bill will help customers switch and engage.

We support the introduction of the TIL. We believe this is a sensible way to allow consumers to accurately and easily compare tariffs and products, although it is not clear it has had a significant effect on improved engagement or switching levels.

4. What do you think has been the impact of the requirement for consumers on expensive dead tariffs to be moved to the cheapest relevant evergreen?

This provision was not relevant to us as our customers are either on a cheap one-year deal (the vast majority of customers) or on our standard variable tariff. In the past, we had a deemed tariff for change of tenancy and people moving into new homes, but this no longer exists.

a. How many consumers were on a dead tariff as of the start of 2012, 2013, 2014 and 2015?

b. Do you have a view of the level of savings made by consumers as a result of this move?

c. How significant has the reduction in the number of dead tariffs been?

One final point is related to governance and good regulatory practice. There is no simple guidance document to RMR rules. For smaller suppliers struggling to come to terms with the complexity of the new rules, this would be very helpful.

Secure and Promote

9. If you are not an eligible supplier under the Secure and Promote Supplier Market Access rules, why have you chosen not to become one?

OVO has a wholesale power and gas trading arrangement with a third party. We therefore have no requirement nor ability to agree trading terms with any other market participants.

10. If you have set up a new trading agreement since the beginning of 2013, has anything changed? For example, has the process been faster, more transparent, or have companies been more receptive?


11. Has the way you purchase energy changed since the Secure and Promote licence condition was introduced? For example, have there been changes in the number of counterparties, types of products, or the clip sizes you buy?

We tend to achieve sharper prices during the Market Making windows when the bid-offer spreads tend to be wider. This is particularly noticeable on the products where there is less natural liquidity (i.e. the longer dated peak products that are captured by MMM). Therefore, as a result of Secure and Promote we have moved to transacting an increased proportion of our requirements during the periods covered by the market making windows and have traded more longer dated peak products.

12. Do prices reflect your reasonable expectation of the cost to purchase power and has this changed since the Secure and Promote licence condition was introduced?

See above. When bid offer spreads are wide it is usually the smaller player that has to cross the spread. For larger, active market participants that can post bids and offers directly onto the market platforms they might expect to trade at mid-market as around 50% of the time another market participant will cross the spread to hit/lift their order. Therefore, when the bid-offer spreads are tighter the price that we pay is more reflective of the true market value of that product. We believe that S&P has reduced the bid-offer spread and so has reduced our transaction costs and resulted in the cost of wholesale power being more reflective of the fair value.

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