Tariffing complexity - the RECAP alternative
14/06/2011
In their Retail Market Review – Findings and Initial Proposals document1 OFGEM state that they are minded to insist that the energy retail industry moves to a single standard form of tariff.
This is predicated on “Behavioural Economics” findings which are reported in OFGEM’s discussion paper on “What can behavioural economics say about GB energy consumers?”
The behavioural economics conundrum
Whilst everything in the logic on how consumers behave rings true what is missing is an examination of the full range of appropriate remedies. The implicit argument appears to be that complexity is clearly bad, therefore simplicity must be the answer.
Simplifying tariffs to make them more easily comparable is seen as the means for getting greater consumer engagement with the competitive market – since there will be less confusion and hence less inaction.
One could challenge this directly given the fact that over 75% of UK households have embraced competition by switching either their gas or electricity supply or both since competition began. With churn rates running between 15 and 25 percent per annum one can hardly call the consumer inactive – even with thousands of different tariffs to choose from.
Even more worrying is that the Law of unintended consequences could well kick into gear (see previous Viewpoint post3) and a measure which aims to stimulate competition and reduce prices has precisely the opposite effect by causing the closure of price comparison sites and reducing the ability of players to differentiate on price for particular products and/or segments.
So if tariff simplification is not the answer what is?
Thaler and Susstein – two of the renowned leading thinkers in the field of Behavioural Economics tackle this issue head on in their book “Nudge: Improving Decisions About Health, Wealth, and Happiness4”. (Highly recommended)
They too highlight the behavioural economic issues associated with having to deal with complex tariffs. However, they also throw into the mix the assertion that the protection of consumer choice is also paramount and that any remedy should both spur on sensible decision making as well as preserving choice.
The RECAP alternative
They put forward the RECAP approach which entails the mandatory recalculation of a households energy spend each year based on their actual consumption data and the making available of this data in an industry standard form to consumers so they can get search engines to show them what they would have paid on alternative tariffs from other suppliers.
The RECAP option would seem a much more sensible alternative to the Simplicity approach
This is because:
- It is well suited to the Smart meter environment with its detailed information on energy consumption
- It enables consumer choice to be preserved – but provides consumers with the insights they need to make sensible decision making easy
- It supports the developments of the variety of different tariffs needed to encourage the use of electric vehicles, heat pumps and other technologies
- It allows tariff innovation in the field of demand response and time of use incentives
Without these diverse tariffs we will not enjoy the full benefits of Smart meter roll-out and gain the Carbon savings needed to meet the UK’s ambitious targets
Notes:
- http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/RMR_FINAL.pdf
- http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf
- http://www.enstra.com/article/simpletariff.html
- http://www.amazon.co.uk/Nudge-Improving-Decisions-Health-Happiness/dp/0141040017/ref=sr_1_1?ie=UTF8&qid=1307552885&sr=8-1