In the UK, 9.5 million households can save over £300 a year by switching energy supplier. For many people that is a substantial boost to their household budget, and yet in a survey of UK consumers, the Competition and Markets Authority (CMA) found that 34% of respondents had never considered switching supplier.
This can be explained in part by status quo bias, where consumers have a preference for the energy deal they are currently on, tending to avoid the risk of changing tariffs. Some academics have also argued that consumers may also perceive the current default as the recommended course of action set out by policymakers.
Last year, the CMA reported that customers have been paying £1.4 billion a year more than they would in a fully competitive market. In response to this, the CMA recommended a series of reforms to the energy regulator, including:
Ofgem-led testing programme – The CMA recommended that Ofgem establish an ongoing programme to test and implement communications to improve customer engagement, including testing the effect of sending letters to consumers showing them the cheapest deals available to them.
Database Remedy – Suppliers have been required to give Ofgem details of all customers who have been on their (relatively expensive) default tariff for more than 3 years. These details will be put on a secure database to allow rival suppliers to contact customers by letter and offer cheaper and easy-to-access deals based on their actual energy usage.
BIT have supported Ofgem with these reforms, and the results of initial testing are now in! Before we highlight key results from this initial testing, it is worth noting that the two trials described below were run at different periods of time, for different lengths of time and with different populations – for this reason, they are not directly comparable.
Cheaper Market Offers Letter
The Cheaper Market Offers Letter (CMOL) trial was carried out by Ofgem’s own Behavioural Insights Unit between June and August 2017. This was Ofgem’s first large-scale trial, conducted in collaboration with two domestic energy suppliers, using Ofgem’s new licence powers.
As Ofgem’s evaluation partner, we provided research support around the design of the trial and the drafting of the analysis strategy, and led the analysis of the trial. The trial report was published by Ofgem in November.
In the CMOL trial, around 150,000 customers on default tariffs were randomly allocated to receive either:
- No letter (control group)
- An Ofgem-branded letter showing personalised cheaper deals from rival suppliers
- A Supplier-branded letter showing personalised cheaper deals from rival suppliers
We then compared switching rates for each group for thirty days after the letters were sent. An example of the Ofgem branded letter is shown below.
We find that letters increased switching from a baseline of 1% to an average of 2.9%. In terms of the number of switchers, more than 1,700 additional people switched as a result of the letters.
Our analysis demonstrates that the messenger is important. The supplier-branded letters were more effective at driving switching compared to the Ofgem-branded letter, possibly due to higher brand recognition. If the supplier letter were scaled up nationally, we estimate that it would lead to hundreds of thousands of customers switching.
One of the most striking findings of the trial is that the letters didn’t just increase the likelihood that customers switched, but also the quality of switches. After controlling for differences in potential savings across customers, those that switched after receiving one of the letters saved on average £50 more than customers that switched on their own accord in the control group.
Interestingly, the letters encouraged both internal switching (to a different tariff with their current supplier) and external switching (to another supplier).
We are delighted by the results of this trial, which show that simple, low cost interventions have the potential to encourage consumers to switch energy tariff and to save more when doing so. We also recommend that this approach is adapted and tested in other regulated markets, such as home insurance or mobile phone contracts.
Database remedy trial
In November 2016, Ofgem launched a smaller scale trial to test the CMA database remedy approach. The full results were recently published by Ofgem.
Around 2,400 customers who had been on a default tariff for over three years were randomly allocated to receive either:
- No letter (control group)
- An Ofgem-branded letter showing personalised cheaper deals (Best offer letter)
- Up to six marketing letters from rival suppliers (simulating the CMA remedy)
Customers were sent a letter from their supplier advising them that they could opt out of being sent energy deal offers. After 28 days, those who didn’t opt out then received either the cheaper deals letter or marketing material in January 2017.
The CMA approach and the Best offer letter resulted in around a two fold increase in switching (against the control). The effect of the Best offer letter was particularly encouraging given it was a single communication and most customers in the CMA arm received multiple (up to six) communications.
It’s fantastic to see Ofgem building their internal capability to run these kinds of trials through their newly established Behavioural Insights Unit. Both trials demonstrate how testing what works is incredibly important before rolling out competition remedies aiming to encourage consumer engagement.
In the case of the Database Remedy trial, a single Best offer letter from Ofgem performs almost as well as up to six marketing letters. In the larger CMOL trial, a letter presenting cheaper offers branded by a customer’s own supplier is more effective than a letter sent from Ofgem. We are confident that these valuable insights can help Ofgem (and other regulators) drive more competition between suppliers and enable customers to save more money by switching to better deals.