Ofgem looking into poor practice of brokers supplying small businesses

Ofgem have announced they will conduct a review into the energy market for small businesses in 2019, in a bid to tackle poor practices by energy brokers.

The regulator has said that their strategic review aims to ‘understand market challenges and consumer experience’, and to draw out from this any short or medium term actions it should take. Focussing in particular on the micro-business sector, Ofgem want to ensure energy supply is being dealt with fairly.

They have said they particularly want to look into whether the smallest businesses need similar protections in place that have been introduced for domestic customers. Ofgem’s statement in relation to the review said:

“This year, we will be conducting a strategic review of the micro-business retail market to understand market challenges and consumer experience. The review will identify the case for short and medium-term actions. We expect to publish an opening statement over the coming months and will invite views and evidence from stakeholders to help inform our thinking.”

The regulator is planning to invite stakeholders to submit evidence and opinion as part of the review process.

The supply under scrutiny will be those who are defined by the regulator as being a ‘micro-business’. This includes companies with fewer than 10 employees, who generally have a low energy usage and therefore very limited power to negotiate for their supply contracts.

In the Ofgem definition, a company is a micro-business if:

●They employ less than 10 employees

●Their annual turnover is no greater than £2m

●They use less than 100,000 kWh of electricity per year

●They use less than 293,00 kWh of gas per year

Figures published by the Federation of Small Businesses (FSB) said that the micro-business category included around 4.3m businesses who have no employees apart from the owner.

Small businesses of all shapes and sizes are encouraged to talk to suppliers or to energy brokers in order to save money on their bills. With an estimated one in four small businesses currently on expensive default tariffs (SVTs), many businesses can save substantial amounts by comparing costs and switching supplier.

Sometimes visiting a broker can be more beneficial than attempting to deal directly with suppliers. Brokers are able to package up multiple demands for service, thereby presenting a larger demand to the supplier and securing a lower tariff for supply.

However, brokers have to make their money somewhere, and this is usually done through either commission on each kilowatt consumed, or through a commission payment. The problem is that these uplifts are not being made clear to small business customers, and this segment are being grossly overcharged for their energy.

The Competitions and Markets Authority (CMA) previously evaluated the marketplace and estimated that small businesses overpay by around £500m a year. Their report also found that energy suppliers profits were significantly higher on small business supplies, than they were on sales to domestic customers, which were at 10.1% for gas and7.9% for electricity.

Ofgem will aim to discover whether the micro-business market requires similar governance and protection to the domestic one. With many micro-businesses barely larger than an average home, they will investigate whether a system such as the energy price cap could be effectively put in place here also.

They will also look at general customer experience, with particular regard to how brokers market their services. Millions of small businesses report being bombarded by calls from energy brokers while at work, with around one fifth claiming they received more than 50 calls in the past year.

The FSB welcome the move by Ofgem, with their national chairman, Mike Cherry, saying:

“It is important that we treat the smallest businesses as customers who require adequate protections like any other consumer. We need to see reform of an unbalanced energy market that has introduced price caps for consumers but has few protections for micro-businesses in often similar situations,” he added. “In addition to price interventions and increased transparency on tariffs, we are calling for proper regulation of energy brokers and their activities.”

Also read: New rules planned for Energy Suppliers as Ofgem vows to protect small businesses from unscrupulous Energy Brokers

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