Understanding the energy tariff rollover

"Prediction is very difficult, especially if it's about the future", said Nobel Laureate physicist Niels Bohr. Even though the gains would be immeasurable, any forecaster will confirm that no amount of investment and human ingenuity has managed to crack telling the future. 

For example, most of us are familiar with the rollover that happens when the national lottery draw hasn't been claimed by anyone. When last week's winnings are rolled over and combined with this week's, it creates a bumper jackpot, stoking amazingly high excitement and anticipation. In January 2016, the prize reached a massive £60 million that way. Wouldn't anyone love to be able to predict those winning rollover numbers? Sure, but much more ordinary things can be just as hard to predict. 

This article is about a much less well-known kind of rollover, where, nevertheless, the ability to predict the future would be pretty handy too. No chances of winning life-changing sums of money here, though an understanding could help save a few hundred pounds a year on your bills.

The humble 'energy tariff rollover' is, despite lesser fame than its namesake, important to discuss because it causes a whole heap of confusion, and could be resulting in huge sums of money being lost via overly high bills. From our experience with customers, we can see in some cases it is needlessly putting people off changing their suppliers to a better deal by damaging trust. 

Specifically, the 'rollover problem', as we have seen it, arises when a person wants to switch their electricity and/or gas deal, looks at a quote for the annual savings that they should expect versus their current deal and asks the precarious question - "How have they actually worked this annual saving out?". So we thought we might as well expose the problems with this and open it up for discussion in the hope that a better way can be found.

Ofgem has done a great job in giving us standard savings calculations, so that the annual savings from a change in tariff almost everywhere are calculated the same way. If nothing else, this makes the results displayed on comparison websites easier to rank in order and offers some general comfort. However, many energy customers, if and when they dig into the figures behind a projected saving, still find the calculations confusing or questionable, and rightly so. The problem is, that without the ability to predict the future, it would be almost impossible to do any better. 

To help explain why, imagine you eat a lot of Baked Beans. Your favourite Baked Beans provider sells you each can at £1.00 and this price will not change in the next year. Now, to your delight, you've found another equally good vendor selling exactly the same beans at 75p a can, also without any risk of change in the next year. Boom. You know for sure you can save a handsome 25p on every can you buy for the next 12 months. Since you know that you eat 100 cans of beans a year (yes, you really like Baked Beans) you can now say with some certainty that you would pocket yourself a good £25 per year from the new deal. It's too bad that energy doesn't always work like Baked Beans though, even with all those convenient assumptions, like knowing exactly how much you will consume in the future, baked in.

Take for example a person with 6 months left on their current tariff, which will then expire. In Baked Beans terms this means your provider will be charging something different from £1.00 per can in 6 months - but that's all you know. The future price after 6 months is unpublished and nobody really knows or could predict what it will be. So how can I know how much changing to the new 75p provider will actually save you over the next 12 months, versus staying with the current one? Unfortunately there is just no way to do this for certain and that's where people start to question the calculations.

Ofgem calculations get around this in a pretty practical way. They assume that once your current tariff has expired, you would be moved onto something called the Standard Variable Tariff (SVT). They do this for the simple reason that in reality that's what happens most often. 

However, some customers do proactively select another deal, or even change their provider at the point of expiry of the current tariff (or even earlier) and those in the habit of doing so will usually be those who question the calculations. 

Absurdly, this leads us to a situation where customers who are savvy switchers and the most frequent users of existing energy switching services' annual savings are far less well predicted by the calculations, than people who historically never switched at all. 

But for the especially inquisitive, the problems don't just end there. So you think you know what the SVT is going to cost you? Think again. Remember, the "V" stands for variable. So even it is subject to changes over the coming year. Imagine the can of beans that you were originally buying at £1.00 could change in price throughout the year to say £1.05 or 98p at any time. The amount you will save by going to the new vendor for the next 12 months isn't necessarily fixed at £25 anymore, though changing over still seems like a pretty good idea. 

The SVT can move up or down during the year, as it mirrors, to some degree or another, what the wholesale market is doing. So the saving that you get at the end of the year by switching away from your SVT, probably won't be exactly what you were quoted when you switched (even with Flipper), or the rollover from your current tariff to the SVT (if you believe it will happen) is actually going to be at a price that today is unknown.

 

Does this mean that annual savings figures that we and others quote are wrong? They certainly aren't 100% accurate, but they offer the best possible indication that exists and will be quite close to reality in most cases. Unfortunately, until somebody figures out how to predict the future, we may well be able to do very little about it all.

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Stephen Smith, Director, Competition and Regulatory Strategy, Lloyds Banking Group