Citizens Advice has responded to the announcement that energy supplier British Gas (Centrica) will replace its standard variable tariff with a fixed term default tariff, as part of a package of new measures for its customers.

Citizens Advice Chief Executive, Gillian Guy said: “Poor value default tariffs that take advantage of customer loyalty have no place in a modern energy market. Centrica’s reforms are a welcome step in the right direction, but the company needs to make it clear how these changes will really make a difference to the millions of customers who have stayed on their high priced standard variable tariff for years.”

“It’s good news that energy companies are taking the initiative by scrapping these expensive tariffs, but we believe consumers still need additional protections. Ofgem is rightly planning to limit energy bills for vulnerable people, while government’s proposed legislation to cap all energy prices provides a welcome opportunity to make the market work better for the 12 million people on rip-off default tariffs.”

Stephen Murray, energy expert at MoneySuperMarket said “We’re pleased to see that many of the measures suggested by the CMA report last year are now gathering momentum, as British Gas joins the ranks of suppliers taking steps to increase engagement and choice in the energy market by scrapping Standard Variable Tariffs (SVTs). This also highlights that industry change – both from a supplier and regulator perspective – is much more effective than a one size fits all price cap, which could have unintended consequences such as many of best deals disappearing, prices finding a higher level and a growing market of disengaged customers.

“We look forward to seeing more details on the British Gas proposals in due course, but the fact is the definition of ‘best deal’ varies from household to household. As the cold weather starts to bite, we’d remind people to take matters into their own hands today and switch to a competitive fixed rate deal to secure savings of £250 or more.”

On Monday, British Gas has announced it will end variable tariffs by April. In a media statement Mark Hodges, CEO, Centrica Consumer said “Today we are taking some big steps to transform the UK’s domestic energy market and give customers a fairer, simpler deal and lower bills. This goal is within our reach. But we can’t get there unless suppliers, the Government and the regulator work together.”

“We have learned from all the recent investigations of the energy market. We have done a lot in the past year. We froze our prices last winter right through until August; we introduced a new scheme to reward our loyal customers; we reached out to five million of our customers to make sure they were aware of the switching choices they could make. But we must do more. We recognise that. That’s why today we have published a series of unilateral actions and a package of proposals for radical change.”

“Chief among them is our decision to withdraw the Standard Variable Tariff (SVT) which is a tariff with no end date. This is vital to encourage customers to shop around for the best deal and make informed choices about energy. These proposals must be given a real chance to work over the next few months and judged independently.  We believe they will have a far more positive impact than a price cap.  That’s because price caps don’t work. They have been tried a lot around the world. Customers actually end up with less choice. Prices cluster around the cap (look at University tuition fees) and customers can’t be bothered to switch. Even the UK’s own competition watchdog, the CMA, says price caps are likely to backfire.”

British Gas measures:

  1.  Unilaterally withdraw the Standard Variable Tariff (SVT) for new customers, to increase customer engagement. We’ve long argued that energy contracts without an end date are one of the main problems with the market. Instead, we’ll offer customers a choice of competitive, fixed-term deals. You wouldn’t expect a car insurance policy to last forever.  We believe that customers should make their Energy choice regularly.
  2. Engage customers already on the Standard Variable Tariff and offer them better deals, to move them away from the SVT. We’ll contact all SVT customers twice a year, and publish progress reports on how we’re doing. This year we’ve already contacted all our SVT customers, and persuaded 10% to switch.
  3. Offer customers a choice of competitive fixed-terms tariffs at the end of their contract. This will minimise the number who go onto a default tariff. When a customer’s deal ends, we’ll offer them a choice of at least two new tariffs.
  4. Introduce a new fixed-term default tariff. Legally we are required to have a default tariff for customers who don’t make an active choice when a tariff ends. But from now on, this will be time limited to 12 months, and will have no exit fees so that switching away is easy.
  5. Provide new offers to respond to customers’ changing needs. These include an online-only tariff, and bundles combining energy with boiler servicing, or with Hive connected home products. We’ll continue to broaden the British Gas Rewards scheme which more than half a million customers have signed up for.
  6. Bring in simple, no-nonsense bills for all our customers. We’ll work with Ofgem to get the necessary permission to bring in much simpler bills as fast as we can.
  7. Continue improving our customer service, and our own efficiency to keep costs and customers’ bills down.

As part of the measures, British has asked the Government and Ofgem to:

  1. Phase out the Standard Variable Tariff altogether, banning tariffs with no end date which weaken customer engagement. This will encourage all customers to make a regular choice of energy supplier and tariff.
  2. Level the playing field on social and environmental policy costs included in the bill. Policies such as the Warm Home Discount are paid for through the people’s energy bills. If that continues, it must apply to all suppliers. Currently some are exempt. That’s distorting the market. It’s unfair that only the customers of the larger suppliers have to pay.
  3. Move the funding of all government policy costs out from energy bills Paying for these policies through energy bills penalises the less well off, hitting them especially hard because energy often makes up a larger portion of their household spending.  We think energy policy costs should be paid for another way, such as through taxation.  This would be fairer, protecting the vulnerable and those who can least afford to pay.
  4. Make the smart meter roll-out more efficient and effective. This programme is beneficial for customers, the future of the UK energy system and the economy. However, it’s very expensive. It adds around £40 a year to our customers’ bills. British Gas is leading the way on the roll-out, but other suppliers are hanging back. This must stop. We must also be able to use the latest, most cost-effective technology. The Government should allow realistic costs for smart meter roll-out in setting a price cap, or the programme could be derailed.
  5. Be more consistent in the way vulnerable customers are treated. At British Gas we believe that supporting vulnerable customers isn’t an optional “nice to have”– it’s a moral and social obligation. No energy supplier should be able to ignore this obligation. It’s part of their operating licence and should be properly enforced. If we’re going to help vulnerable customers, we also need a better definition of vulnerability from the regulator. The current terms are confused and sometimes even contradictory.
  6. Simpler bills. Energy bills are too complicated. Customers want them to be clearer. We need Ofgem to remove the strict rules that cause unnecessary complexity.
  7. Refresh the calculation of the price cap for customers on pre-payment meters. The present calculation is muddled. It creates a risk that suppliers will not bother to serve customers on pre-payment meters because it’s not economic. That’s not good, either for those customers or for competition.