Why do we choose to switch energy suppliers? Can better information help us all save money? Xiaoping He and David M Reiner talk about their latest study on Customer Engagement in Energy Markets.
Energy bills have played an important role in public debates over financial strain on households (‘pocketbook issues’). In particular, the energy regulator and consumer watchdogs repeatedly argue that consumer switching can offer significant savings for consumers.
Great Britain was the first country to allow retail competition in the residential electricity and gas sectors and retains one of the most active markets. Yet despite the diversity of options and the relative ease of switching, according to an investigation into the energy market by the Competition and Markets Authority, over half of domestic customers claim to never have switched supplier and 34% have never considered switching suppliers although they may participate in the market in other ways (such as switching tariffs). This concern that consumers do not switch as much as they ‘should’ led to cross-party support for a price cap, which came into force on 1 January 2019 although consumers would still gain far more from switching than from relying on the price cap.
Our study: the role of information and knowledge
Building on our past work on the drivers of switching among British households, we investigated the factors associated with household switching behaviour and focussed on the role of information and knowledge. Few studies have distinguished between different forms of information and their impacts on consumer engagement, in particular, internal and external information.
- Internal information refers to past experience and existing knowledge of the consumer
- External information search involves asking friends or neighbours’ opinions or finding information through web sites or the media
Our study explored three types of internal information processing relevant to choosing energy suppliers and energy tariffs: (i) claimed awareness of energy tariff differences, (ii) professed knowledge of household energy expenditure, and (iii) familiarity with energy tariffs.
We analysed three large surveys of British households carried out in 2014, 2015 and 2016 for the Office of Gas and Electricity Markets (Ofgem), the energy regulator in Great Britain. We focussed on three decisions regarding household participation in energy markets: (a) switching to an alternative electricity and/or gas supplier; (b) switching to an alternative electricity and/or gas tariff; and (c) changing payment method for household energy bills.
1. We change tariffs more than suppliers
The results show that consumers more frequently change tariffs than change suppliers or payment method. Supplier messages and Internet searches helped these decisions, but varied with the information source and the participation type. A possible reason is that the uncertainty and complexity of switching varies between suppliers and tariffs insofar as there are many more options available when switching suppliers.
2. We don’t believe prices vary that much
Our results confirm that many consumers don’t believe that energy tariffs vary significantly, making them less likely to switch. Improving consumers’ understanding of the range of available tariffs could help promote greater engagement.
3. Being better informed helped consumers
Familiarity with various energy tariffs and knowing your own household energy spend was also linked to greater consumer participation. This implies targeted information campaigns may be effective in encouraging consumer engagement in markets.
Our study also found evidence that Internet searches lead to greater switching, but messages from existing suppliers can discourage households from switching. This shows the Internet is an important channel for obtaining information related to household energy spending and comparing different deals, whereas messages from the current supplier may encourage loyalty and thereby help suppress switching.
Switching could be an important tool in helping stretched household incomes, but the challenge remains of how, two decades after these markets were first established, to engage the large share of consumers who currently do not currently participate in the market.
Read Xiaoping He and David M Reiner’s full working paper online here.