Energy suppliers manipulating customers

The latest energy price rises will occur in such a way as to wring more money out of the unsuspecting customers who regularly switch

British Gas, part of Centrica, has set the scene for a large price hike in the near future. This follows ScottishPower, part of Iberdrola, which has already published massive increases. Both companies have reported record profits again, as the difference between wholesale and consumer energy prices has widened significantly in recent years.

We can expect the energy companies to maintain larger margins with these price increases.

Price rises aren't necessary

So much for regulator OFGEM's recent gas and electricity 'shake-up', which is how many of my colleagues in the media rushed to report OFGEM's recent market review. Apparently they didn't actually recognise how empty OFGEM's plans are. (I wrote about it in OFGEM proposals unlikely to do much good.) The suppliers responded positively to OFGEM's “tough” measures (which has got to be a bad sign), making out as if the changes were significant and good for the consumer.

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Many consumers and commentators were fooled. Energy companies have been very successfully manipulating customers and the media over the past few years. The media willingly copies-and-pastes the energy companies' press releases when they say that customers' bills must rise because suppliers' costs – such as wholesale prices – have also risen.

Yet a good number of these hacks failed to recall that our bills didn't budge downwards much when wholesale prices collapsed a few years ago, or when a similar event happened about ten years ago. Hence, now that customers' bills and wholesale prices are both rising, this means the margin between them has not just hugely increased, but it will be maintained.

Why you shouldn't wait to switch

ScottishPower's gas prices are to go up 19% on average and its electricity up 10% from 1 August. It's the first supplier to announce increases, but it's normal for the big six to follow each other over a period of several months.

This isn't just a weird game of copycat. Suppliers benefit at customers' expense not just by following each other's moves, but by doing so in this prolonged way. Like an aging Nelson-era frigate that has timbers that have become too old to support its cannons firing all at once, the suppliers fire one after the other in a rippling broadside. The difference is that the suppliers don't do it to stop themselves falling apart, but to wring out every last pound they can from regular switchers.

Over the past few years, I have found that this pattern pulls the wool over the eyes of journalists, commentators and customers, manipulating them to behave in a way that makes customers hand over more money to the suppliers. Here's how it has worked:

A “big six” supplier announces a major price increase.
Journalists and other commentators say that you should wait till the other suppliers increase prices before comparing and switching.
However, the prices of the cheapest tariffs available to new customers don't go up. For the most part it's just closed and standard tariffs that go up as announced.

The press continues to fail to notice this, and therefore the significance of it. If the cheapest, latest tariffs don't go up, but closed and standard tariffs do, waiting for longer to switch to a cheaper tariff makes no sense. You would have saved more money if you had switched as soon as the first supplier had made an announcement.

I compared ScottishPower's cheapest tariff now with its cheapest four months ago, based on an average user. Despite the big increases to standard tariffs and tariffs closed to new customers, the cheapest tariffs are the same as in February. (Well, practically – they're 66p per month higher on an annual bill over £1,030. How dreadful.)

Those cheapest tariffs – which again, aren't going up in this latest round – are also variable. That's worth noting at a time when commentators, customers and yes even suppliers are saying you should fix to avoid rises. I think there is still a case to fix if you can find a tariff at the right price, but the fact that the very newest variable tariffs haven't historically gone up with the announced changes weakens that case.

Don't be manipulated – switch before winter

Waiting for the broadside to end has made no sense historically, and it has cost you more money. I know, because I have collated the data myself and done the sums. You are likely to waste money by staying on your current tariff until all the suppliers have adjusted prices because, if the past is anything to go by, the suppliers won't increase their cheapest open tariffs at the same time as their headline price increases.

So long as this trick keeps fooling customers, we can expect the suppliers to keep doing it. The bottom line is clear: don't wait for all the big six to announce increases. I recommend that, if your energy comparison shows that you can save £100 or so, you should do so before the weather turns cold.

Avoiding exit fees on switching

I talked with a spokesperson at ScottishPower and he said everyone should receive notice 30 days before their prices go up. He said that if you contact ScottishPower before the increase on 1 August and initiate a switch you should not be charged the exit fees in your contract. I asked if there were any conditions to this, in particular asking if you have to tell them the reason you're switching or put it in writing. ScottishPower told me there were no conditions, you just have to call while you make your switch.

Even so, cover your back. I would make it clear to ScottishPower that you're switching because of the rise and that it shouldn't charge you the exit fee, and I would email them immediately afterwards summarising the conversation and what was agreed, then switch immediately so that you don't run out of time.

In my most recent test, ScottishPower's cheapest online tariff is the cheapest available in some areas. You can see the cheapest tariff in your area using lovemoney.com's energy quote engine.

More: Compare gas and electricity prices | OFGEM proposals unlikely to do much good | 5 gas and electricity rip-offs