Automatic energy switching: a win for consumers and behavioural public policy

Photo by Jason Richard on Unsplash

We doubt any of us would say no to a £300 windfall. Indeed, most of us would be thrilled!

It could cover the Christmas shopping, pay a chunk off your credit card bill or simply boost your rainy day savings fund. The good news is that the typical UK household could have an extra £300 in the bank this time next year if they switched to a cheaper energy deal. Yet despite this money being there for the taking, very few households actually make the switch.

Switching is a behavioural challenge — one that’s interested us here at BIT since the team was set up a decade ago. The behavioural barriers are clear. We tend to stick with the same provider for years, even decades, because of a deep inertia and tendency to stick with the default. Our busy lives leave little time and inclination to shop around for alternative deals. Even if we do, we are faced with an overwhelming array of choices and a switching process that is time-consuming and full of frictions.

With these obstacles in mind, we’ve rolled up our sleeves and run multiple trials in the UK and Australia designed to increase energy switching. In our early trials, working with Ofgem, we tripled energy switching rates with relatively cheap, light touch interventions. Building on those results, Ofgem’s most successful trial — asking people to opt-in to a ‘collective switch’ — increased switching eight-fold, encouraging around 22% of consumers to switch. That’s starting to get to a switching rate that shocks the market into providing better deals to a wider group of consumers.

A policy designed to go with the grain of human behaviour is a big win for UK energy consumers.

In total, Ofgem’s trials included over 1.1 million customers and resulted in over 94,000 of them switching to new energy tariffs, saving around £21.3 million between them. However, in order to be effective in shifting the market to a fairer, better equilibrium, these remedies need to be rolled out more widely and designed in a way that makes it as easy as possible for consumers to switch. This is especially important for lower income and vulnerable households who face additional barriers to switching and a large ‘loyalty penalty’ across essential service providers.

That’s why, alongside these experiments, we’ve recommended more radical, market-shaping options. Specifically, we’ve called for policies and services that would regularly and automatically switch consumers to the best available deals. And so we are delighted that today’s Energy White Paper echoes our intent to make switching easier. Recommendations include:

1. Creating the framework that enables the introduction of opt-in switching by 2024 and;
2. Consulting on how opt-out switching could be tested by March 2021.

In practice, opt-out switching could mean consumers would be automatically part of a collective switch to the best available deal when their contract term ends. They would be able to opt-out and stick with their existing supplier, but if they don’t it would be a friction-free, almost automatic, way to switch to a cheaper deal when their contract ends.

While this progress in energy markets is to be celebrated, there is a long way to go to remove the loyalty penalty that sees UK consumers overpaying

A policy designed to go with the grain of human behaviour is a big win for UK energy consumers. It will lower energy bills at a time when household budgets are under enormous pressure. It will also have a wider impact — making suppliers work harder on price and quality in order to keep their existing customers and attract new ones. In short, this remedy should improve the functioning of the UK energy market.

While this progress in energy markets is to be celebrated, there is a long way to go to remove the loyalty penalty that sees UK consumers overpaying to the tune of £4 billion a year across mobile, broadband, cash savings, insurance and mortgage markets.

Automatic switching could help consumers stuck on poor value deals to lower their bills, while helping Ofcom and the FCA to drive greater competition and quality amongst suppliers. We applaud the bold move by BEIS and Ofgem to test automatic switching on a wider scale and encourage other regulators to follow suit across a range of markets.

By Elisabeth Costa, Senior Director, Policy and Partnerships & Katy King, Senior Advisor — Business Growth, BIT