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Customers switching for greener energy

October 29th, 2010

The proliferation of direct and internet insurers plus the emergence of a new generation of online aggregators mean that an increasing number of people now change providers of financial services products such as mortgages and car and house insurance every year.

When it comes to paying for domestic electricity supplies, moreover, switching has been officially embedded into UK competition policy and energy industry practice.

Just look at this quote from the Energy Retail Association’s guide to the UK electricity market.

“The engine of competition in the retail energy market is customer switching or ‘churn,'” it states. “By switching suppliers, customers can act as a competitive constraint on suppliers’ pricing and provide strong incentives on suppliers to reduce costs, improve services and develop new products.”

The motivation for consumers is cost, with the ERA estimating that customers who have never switched and pay on receipt of their bill, or by using a prepayment meter, can save around £100 a year by moving suppliers.

Online and telephone comparison and switching service uSwitch goes even further, claiming that 10pc of all people who switch both their electricity and gas suppliers save up to £530 a year. It says one family of eight recently saved an annual £2,500 by switching to an online dual energy plan.

Five million Britons have got the message and are switching at the rate of 100,000 a week – the highest rate in any of the world’s large energy markets.

Now, compare this vibrant switching market with surveys that consistently show respondents claiming that they prefer to buy goods and services with sound green credentials.

The latest Landor ImagePower@Green Brands survey, for example, found that 50pc of UK respondents were actively buying products with less packaging or recycled packaging.

Nearly six out of ten Brits are now apparently eschewing plastic bags when shopping for groceries and 55pc of people are apparently choosing energy-saving appliances over conventional ones.

In addition, a survey of UK consumers this year by The Centre for Retail Research found that UK consumers are happily paying an average price premium of 44pc for green retail products.

Factor in the growth of the internet with its wealth of comparison information and instant order-taking abilities and this is where future-gazing gets rather exciting for those plotting the transformation that Britain needs to comply with its carbon reduction commitments.

What could happen when all three trends combine? Can Britain develop a consumer electricity market where progressive companies that buy green energy from renewable or low-carbon sources are actively preferred by consumers through regular, direct and highly transparent green buying behaviour?

Might consumers one day get electricity bills detailing exactly how much of their power has come from wind, wave, solar, tidal and biomass energy? If they don’t think it’s enough, they could switch to a greener competitor.

The direct channel of the internet could effectively allow consumers to challenge the environmental credentials of their energy suppliers.

Power company laggards in meeting the climate change challenges would face a new and forceful consumer-led punishment in addition to penalties under European Union and UK carbon reduction regimes, whilst consumers would be given the opportunity to practice what they preach in the aforementioned surveys by voting with their power bills for a more sustainable future.

It’s quite a breath-taking scenario but so far, progress has been slow. Firstly, the switching trend is relatively new and is taking time to translate to the energy market.

The ERA reckons that only 17pc of UK energy consumers are proactive switchers, changing every 12 months and regularly checking prices.

Of the remainder, 37pc are reactive, having switched at least once but typically only responding to a sales call from a salesperson, and 46pc have either never switched or have done or so only once and say they are unlikely to do it again,

The results among older consumers are even worse, with 69pc of the over-60s having never having switched supplier. Overall, uSwitch reckons that just 13pc of the UK’s 26m households are paying the cheapest energy prices on the market through online dual energy plans.

Then there’s the difficulty in sustaining consumers’ green preferences and translating this into buying behaviour choices.

Evidence suggests that the recent recession for example has focused consumers’ attention on energy prices to the detriment of green electricity plans, which have tended to be less competitive than other plans.

There is also a lack of clarity over what constitutes a green energy plan. Electricity industry regulator Ofgem at one stage talked about introducing a very simple traffic light system to help people decide how green they wanted their electricity to be.

However, this has since been diluted to the point that some specialist “green” electricity suppliers have refused to be accredited under the scheme.

All this means that the brave new world of energy where customers can drive the behaviour of power companies like they influence product ranges and pricing power in supermarkets is some way off.

Yet, consumers have long driven corporate behaviour on environmental issues in Germany and Scandinavia. As Britain develops strategies to cope with the energy challenges over the next 50 years, linking consumers’ choices to their green ideals may be an important part of building a sustainable future.

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