Energy consumers churning around


At a time when GB energy markets are more in flux than ever, Anna Moss describes how utilities are tackling customer churn in the domestic energy market.

The GB household supply market has been on a journey of customer engagement since privatisation.

Market intervention and increasing rates of competition have pushed consumers to engage in supplier switching in the last 20 years. However, while we have seen an almost doubling of the electricity switching rate (to 20% annually) over the last decade, we continue to talk about “weak consumer response”.

The first major market intervention was Ofgem’s Energy Supply Probe, which found that competition was not working in customers’ best interests, partly driven by a lack of engagement and “poor decision making by consumers”.

The Energy Supply Probe remedies first saw the light of day in 2009 and aimed to improve the conduct of sales and marketing activities and the information provided to consumers.

They were tabled at a time when the annual switching rate was similar to today’s at about 20%, but there were concerns as to the barriers in making “effective choices” – a feature still relevant in today’s market. Just four years later, and with switching rates on the decline, further measures were introduced through the Retail Market Review. This time, amongst other measures, a maximum limit was enforced on the number of tariffs that suppliers could offer to limit customer confusion and price differentiation.

New measures

Over the following years, the conversation around engagement became more nuanced, as the baton was picked up by the Competition and Markets Authority (CMA). In its Energy Market Investigation 2014-2016, the CMA highlighted disengagement in the retail markets.

It attached “particular significance to the fact that [gains from switching] are available at such levels to customers for domestic gas and electricity”, and yet those savings went unexploited. The issue was carried forward by the then Business Secretary Greg Clark, introducing the Domestic Gas and Electricity Tariff Cap in 2018.

Today, measures of engagement and switching are among the indicators used by the regulator to determine whether the cap should be removed.

Following the introduction of the new measures and a concurrent step back from doorstep sales by all the then Big Six, switching rates dropped to around 13% in 2014.

This trend was then reversed and switching hit historic highs in 2019 of 22% in electricity (see Figure 1), following a steady upward trajectory with some seasonal variation.

Making the switch

So how has switching fared in the past year?

Unsurprising in the COVID-19 pandemic, the monthly switching figures trended downwards, reflecting several factors, including a step back from face-to-face sales during lockdown periods and the mixed impact of the default tariff cap.

The default tariff cap has seen electricity switching peak when the cap has been adjusted in price (April and October).

Figure 1: Total electricity switched January 2017 – June 2021. Source: Cornwall Insight, derived from Energy UK data

According to Ofgem’s Consumer Survey 2020, 30% of those engaged in the market were prompted to do so by receiving a price increase notification from their supplier.

But the cap has had other unintended consequences in the switching market. During the winter period of 2020/21, switching rates were lower than usual. The default tariff cap had fallen by £84 to £1,042, and the level of savings made by switching from a cap level tariff to the cheapest tariff in the market had halved to just over £200 from a peak of more than £400. Despite the fall in the cap, the average price of the cheapest direct debit tariff from each supplier across the market had been rising.

These trends illustrate the counter-intuitive nature of the cap due to the lags in its wholesale price setting. The 1 October 2020 cap was based on wholesale prices from February to July 2020, when they were at the trough of their COVID-19 slump.

Subsequently, they rebounded, taking marketled fixed tariffs with them. Political messages around the cap continue to be led by its perceived money-saving capabilities, despite capped prices remaining some way above the market and potentially disincentivising at least some of those teetering on the edge of engagement from bothering.

Figure 2: Monthly domestic switches by suppiier size – Image credit: Cornwall Insight

Prices on the rise

On 6 August 2021, Ofgem revised the price cap for October 2021, increasing the level by £139 to £1,277 and reflecting the sharp rise in wholesale gas and electricity markets due largely to the economic rebound in response to an easing of lockdown conditions.
The jump in wholesale prices and the expected rise in the price will have a clear and material impact on domestic bills. It would be expected that due to this the coming winter may lead to a resurgence of engagement by customers as they look to switch suppliers in search of lower-cost alternatives.

However, despite these expectations, the record highs in wholesale prices have resulted in the removal of many tariffs from the market, with some suppliers stopping customer onboarding completely. This seems certain to reduce the switching rates in the period up to October, a time when switches are historically high.

Customers on the move

The latest electricity switching figures from Energy UK showed under 3 million customers switched electricity suppliers in the first half of 2021, a 1% increase on the same period of 2020 and a 0.02% fall in 2019. June saw a 2.6% fall in switching compared to June 2020, with 433,868 switches made during the month (Figure 1). As a result, the annualised domestic electricity switching rate has fallen below 20% (19.6%), similar to that recorded in 2018.

As to where these customers are moving to, half of the domestic electricity switches were between large suppliers (Figure 2), and 30% were customers switching from large to small and medium suppliers (SaMS) (118,042).

Due to high wholesale prices and suppliers exiting the market, the tariffs available to customers have been significantly reduced.
However, the switching figures do not currently show this impact, with a lag in contract offer and starting the industry process.

Mix it up

Looking across the supplier groups, some suppliers have felt the impact of consumers switching away more than the others, for SaMS churn rose alongside the increase in new competitors until mid-2017 when it began to decline. Churn for this group is now around 30% but has fallen from a peak of almost 33% at the start of 2020. Large suppliers have also seen increases in the churn rate, up from 12.5% in 2015 to around 18% recently.

It is expected that there will be a higher level of customers switching away from SaMS, as they do not have a legacy customer base. Alongside this, the very nature of the customers signed to smaller suppliers – they have had to make an active switch at least once – demonstrates some market engagement that is likely to be repeated.

The variation of customer churn across the market is due to the significant number of newer suppliers growing their customer base relying on one-year fixed-rate tariffs.

As a result, their churn will be limited until the customers reach their renewal period.

However, churn is not limited to these suppliers, with churn varying between customer groups and demographics as they all have varying tendencies to engage with the market. For example: End of a fixed-term tariff, increase in price, house move, looking for a different choice of offering, recommendation from a friend or poor customer service experience.

Round and round Engagement will continue to be a big focus going forward, taking a front and center role in Ofgem’s Retail Market Strategy for the 2020s.

Here, the regulator accepts not everyone will engage and plans for it through measures like opt-in and opt-out switching, which have been trialled during the last year.

However, high customer churn creates a challenge for all suppliers, not just SaMS, looking to maintain and build a customer portfolio. Trying to mitigate churn in an environment where suppliers are being hit from all sides is undoubtedly difficult, but managing these risks will be increasingly important to maintain and grow a business, as the cost of customer acquisition can be high.

About the author

Anna Moss is Head of Consumer Markets at Cornwall Insight. Moss manages and develops the research in the supply sector, supporting the analytical team in their day-to-day activities. She works with a range of market participants across the domestic and non-domestic sectors, including energy suppliers, providing support in analysing key developments in the supply market.