Businesses pay too much for energy, at risk from rogue brokers

Buildings, piles of money, bills

Microbusinesses are still paying almost a third more for their electricity and 50% more for gas than they should according to Ofgem and mis-selling of energy contracts by brokers has discouraged businesses from looking for better deals.

What is Ofgem going to do?

The regulator is to present an action plan to protect such firms from unfair deals and unscrupulous brokers before the end of the year.

The plan will be based on findings from a strategic review into the sector launched in the spring.

gas and electricity icons

The review was ordered as a previous attempt at addressing the problems in 2017 has not met expectations.

Research shows microbusinesses struggle to find a good deal because the complexity and variety of contracts combined with hard-to-find information about tariffs.

It is costly and time-consuming for owners to make informed decisions about what tariff is best for their needs and many do not seek out better value suppliers.

The result is that they “pay a higher loyalty penalty than disengaged domestic consumers” according to Ofgem.

A microbusiness is defined as one which has fewer than 10 employees and has an annual turnover of £2m or less. The microbusiness energy market is worth around £3.5bn.

A 2016 Competition and Markets Authority (CMA) report referred to alleged “malpractice” reducing trust and interest among microbusinesses in trying to switch tariffs.

It also pointed to transparency failures and “the existence of incentives not to give non-domestic customers the best possible deal.”

Combined with a lack of pricing data this means such firms pay more than they would in a fair market and are discouraged by the difficulty of comparing prices. So, the market lacks competitive pressure, allowing suppliers to charge more.

What has been tried already?

In 2017, the CMA told suppliers to make pricing information clearer and more accessible. This was to be done through an online quotation tool or via price comparison sites.

While Ofgem is happier with the information now made available, the regulator believes the move hasn’t encouraged enough customers to explore the range of offers or switch to a better deal meaning many microbusinesses are still on pricey default tariffs.

work desk

An Ofgem survey found that among businesses who did not shop around, 43% thought all suppliers charged identically and 51% thought there was little variation in tariffs.

Ofgem said pricing is still “far from fully transparent” and companies withhold valuable information from customers.

Previous protection measures included ending suppliers’ habit of automatically putting customers onto more expensive tariffs and stopping “backbilling” for energy used more than 12 months prior.

Ofgem’s Anthony Pygram said too many microbusinesses were still suffering “significant consumer detriment” because of the “complex and at times opaque market”.

He said the review was intended to create “a properly functioning competitive retail energy market”.

What part do energy brokers play?

To save time, many businesses turn to energy brokers to find the best deal. Unfortunately, many brokers also lack transparency.

Ofgem intends to look at what can be done to rein in such rogue operators.

“Weak broker regulation is allowing room for sharp practices by some brokers. Gaps in current consumer redress mechanisms add further to this harm.”
- Ofgem, Opening Statement - Strategic Review of the microbusiness retail market
office desks

The estimated 3,000 energy brokers in the UK are not specifically regulated by Ofgem, but they do have to abide by general consumer protection rules.

Brokers are part of a group known as Third Party Intermediaries (TPIs), which also includes price comparison websites.

More than two thirds of small businesses buy electricity or gas from a TPI. Though some offer online services, most TPIs still use the phone to conduct their business.

According to Citizens Advice this is a source of annoyance for some business owners who complain that the number of unsolicited calls from TPIs is increasing.

It said owners complained of “repeated cold-calling and bullying” by TPIs, with some receiving multiple calls on the same day.

Many are seemingly misusing personal data from the Electricity Central Online Enquire Service for such direct-marketing.

Citizens Advice also cites concerns over TPI fees and charges not being clearly explained, failures to detail how much of the market is searched to find a tariff, failures to reveal relationships with suppliers and failures to offer the best deal.

Perhaps more worryingly, it identified instances of some TPIs engaging in fraud.

There are cases where TPIs hid their identity and claimed to be calling from the government or from the customer’s supplier, for example. Some went so far as to fake phone recordings or contracts.

In other cases, phone calls in which binding verbal agreements were made were not recorded by the TPI, making it impossible for the business to prove it had been mis-sold a deal.

Businesses are being sold contracts which do not meet their needs or are sold contracts as if they were “the best deal” for them when in reality they offered the best commission for the TPI.

Sometimes owners were told a switch to another supplier was obligatory or a technicality, or that they were not switching but merely consenting to receiving more information.

Customers often found the details of price or duration on contracts they were sent later were not what they had agreed to.

TPIs also come under fire for their failure to deal with complaints, leaving business owners to take the issue up with suppliers directly.

How do I find a broker I can trust?

Remember these tips when choosing a broker:

  1. Ask the broker which suppliers they represent. While some check the whole market for deals, others use only one or a few suppliers.
  2. Ask how they make their money: do they get commission, a one-off fee or do they get a percentage of your power bill?
  3. Remember, brokers are not obligated to find you the best deal.
  4. Take care that you are clear about what the broker will do for you, how they are paid all other terms and conditions before you accept.
  5. Check if your price will vary within the life of the contract or if it is fixed.
  6. Remember, agreeing to a contract over the phone is binding.
  7. Find out if the contract has a termination fee.
  8. If you have a complaint about a broker or TPI, contact your local trading standards officer or the Office of Fair Trading.

It will be interesting to see what recommendations Ofgem comes up with to protect microbusiness owners from such cowboy behaviour.

Updated on

The services and products mentioned on this website may only represent a small selection of the options available to you. Selectra encourages you to carry out your own research and seek advice if necessary before making any decisions. We may receive commission from selected partner providers on sales of some products and/or services mentioned within this website. Our website is free to use, and the commission we receive does not affect our opinion or the information we provide.