Standard Variable Rip-off?

A rip-off is a ‘theft, cheat, swindle or exploitation of those who cannot prevent or counter it’. And a lot of people think that’s a pretty good description of the Standard Variable Tariff (SVT) that the big energy companies use to price gas and electricity. Unless you’ve opted for a fixed price energy contract, then by default you’re being charged your supplier’s SVT – and you’re probably being ripped off!

According to a report published in November 2016 by OFGEM, the energy regulator:

• Two-thirds (66%) of all customers are on their supplier’s SVT
• These SVT customers are paying 12% more than the cheapest tariff offered by their existing supplier, and a whopping 21% more than the cheapest tariff offered by any supplier.

You can access the more info on the OFGEM report here.

Too many numbers? Let me simplify the message – most customers could cut their energy bill by about £15 a month simply by switching to a cheaper tariff from another supplier.

What’s going on here?

Energy companies offer cheap fixed price tariffs to entice new customers. But most of us don’t want to switch – we have a big behavioural bias towards doing nothing. OFGEM data shows that about 40% of all customers have been with the same supplier for at least three years (see millions-of-households-penalised-by-Big-Six).

If we haven’t switched before we might be worried that something will go wrong. We’d have to do SLOW thinking to figure out if switching really was a good idea – and we don’t like to spend time doing that because it’s difficult and tiring (see my previous post: thinking fast and slow). In this blog I try to show people how we can use psychology to improve the way we manage money, but the Standard Variable Tariff is an example of the reverse. It demonstrates how big companies are exploiting the same psychology to overcharge us for a bog-standard everyday commodity which we could buy from a dozen different suppliers – and that’s what makes it a rip-off.

How did we get here?

Until the 1990s electricity and gas were supplied by Government-owned monopolies at a standard price to all consumers. Then the government decided to introduce competition, in the belief that competition would result in more efficient companies and lower prices. Now six large companies dominate the market, and they offer a bewildering range of tariffs to entice customers to switch.

Fixed price deals started out as a kind of insurance offered to customers, as temporary protection against rising oil prices. But energy companies have learned that they can charge most of their customers on SVT a higher variable price which enables them to offer lower fixed price deals to the minority of customers who are prepared to switch suppliers.

So the energy market has become a bit like a wide and lazy river where the current only flows fast and strong in a narrow channel, and where most of the water is sluggish and scarcely seems to move.

What should I do?

The regulator and the government are aware of the problem and are discussing possible remedies. But don’t hold your breath – that could be some way off.

If you’ve got the energy and the courage, then most money management websites would recommend that you switch to the cheapest supplier now, and repeat this exercise in one or two years time, whenever your fixed price contract comes to an end. But be aware that switches don’t always go smoothly. Martin Lewis’s Money Saving Expert website has a very helpful video on energy switching here

As a lazy human I’m personally not interested in spending hours finding the absolutely cheapest deal, but I do resent being ripped off just because I’m a loyal customer. So I’m no longer paying the Standard Variable Tariff, and I now follow a four-step “rule of thumb” every time my fixed-price dual fuel contract comes up for renewal:

1. Use a price comparison website to check what the cheapest available contract would be.
2. Compare that to the cheapest available deal offered by my current supplier.
3. If there’s a big difference then switch to the new supplier. (I think of ‘big” as a difference of 10% or more – but you might have a different threshold)
4. If the difference is not that big, then take the cheapest deal offered by my current supplier.

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