Imagine an energy market where loyalty is rewarded

Ofgem introduced a Ban on Acquisition-only Tariffs (nicknamed in the BAT in industry circles) in April 2022 as a temporary measure to stabilise the market.

The ban stopped energy suppliers offering cheap introductory prices to new customers and refusing to give loyal customers the same deal. Since the ban came in, energy has started to look more like other industries, where consumers can really trust their supplier to look after their best interests.

Imagine an energy market that looks more like supermarkets – where:

• people have confidence they’re getting a good deal without the hassle of having to constantly change where they shop;
• companies reward loyalty through exclusive deals and points that can be redeemed against the weekly shop; and
• behind the scenes, companies innovate to provide a plethora of offers to attract and retain customers whatever their needs – just like the weekly specials, multi-buys, home deliveries, or slashed prices as products reach their expiry date we see in supermarkets today.

For decades, energy looked nothing like this. Loyalty was punished.

Most suppliers focused on getting customers through below-cost “teaser” tariffs to new customers only. The cost of these discounts was actually paid for by loyal customers’ higher bills, and in the expectation that many new customers would ultimately default onto high margin “squeezer” prices, to swell the overpriced customer numbers.

Over the last 5 years, the price cap has limited the squeeze on loyal customers. But even so, competition still revolved around offering exclusive deals for new customers. It was not about making great value available to everyone, or innovating for example in smart tariffs that give discounts for using electricity off-peak.

Exclusive acquisition deals benefitted the minority of customers (never more than 23% a year per Ofgem’s data on number of customers switching) who were willing to switch supplier, at the expense of everyone else.

These deals excluded many millions of customers from the market, who were sitting on the price cap but who wanted to take a better deal with their chosen supplier. And they stifled innovation in smart tariffs which help people to save money and support a quick and efficient transition to net zero.

With the ban on teaser tariffs, the market is beginning to change for the better

Thanks to the ban, suppliers can no longer exclude their existing customers from their best deals. And the market dynamic is beginning to change for the better.

More suppliers have recognised the value of holding onto their customers for longer. They are offering loyal customers exclusive fixed term deals and rewards – with some even passing on efficiencies to their standard variable tariff (SVT) customers at below price cap levels.

In fact, now around a quarter of customers on these default tariffs are paying below the price cap (Ofgem’s data; Supplier’s average annual standard variable tariff and number of domestic customers charts).

Thanks to Ofgem’s rule, acquisition tariffs are open to existing customers as well as new customers – allowing everyone to benefit quickly from a falling wholesale market for the first time.

Without the “easy” option of growing through exclusive teaser deals, suppliers are having to widen the range of tariffs they have on offer. Innovation is ramping up – with a big uptick in the options for smart tariffs to both attract and retain customers.

A casual look at adverts will show the recent focus has been on deals structured for the rapidly growing number of electric vehicle (EV) owners. But tariffs are also emerging for those with heat pumps and batteries.

More and more households without clean tech are now being rewarded for moving their usage out of peak times through innovative schemes like Octopus’ Saving Sessions and Power-ups.

There are signs that customer trust is on the rise – with customer satisfaction levels increasing slightly, even for those companies not traditionally known for good service.

It may be too soon to proclaim the uplift in trust and service an enduring trend – and much further improvement is certainly needed in the industry overall. But customer behaviour during the energy crisis revealed that a significant number of people are prepared to switch suppliers simply to get better service.

With people beginning to consider their options as the market opens up again, any supplier wanting to hold on to customers knows they need to focus on improving how they look after them.

Further parallels are emerging with supermarkets now that non-viable suppliers have exited and some challenger businesses are at scale. Just as Lidl and Aldi keep traditional high street supermarkets on their toes, lower costs and new products from energy challengers mean suppliers are constantly under pressure to hold onto their customers as well as attract new ones.

Price comparison websites are also turning their focus from touting short term deals which only work for those willing to switch supplier, to offering people impartial advice on running their homes in a more cost effective way.

Ofgem has redefined what a healthy energy market looks like

Ofgem introduced the BAT to stabilise the market during the energy crisis, but it has made the market work for more than just the small proportion of customers willing to switch supplier, and has redefined what a healthy energy market looks like.

By creating a market where suppliers compete to provide long term customer value by offering better service, efficiency, innovation – not to grow market share through short lived exclusive deals that customers ultimately pay for – Ofgem has laid the foundations for a supply market truly fit for net zero, and that benefits everyone, not just the few.

As the wholesale market stabilises and more customers signal their intent to come off the price cap and go back into the market, there is huge potential to create positive momentum from these new foundations.

Allowing teaser tariffs again would be a big mistake

The BAT is due to expire at the end of March 2025 and Ofgem is considering removing it 6 months early. At the very least, Ofgem should use the next 12 months to monitor its impact. This isn’t a simple question of what is happening to supplier switching.

Ofgem should take time to assess whether the developments we’re beginning to see in innovation, good value deals for all customers, and improvements in customer experience endure and snowball to bring further positive change in the market.

Ultimately, the ban on exclusive teaser tariffs should be a permanent feature of the energy market to change it for good.