Newcomers try to shake up energy market

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By Jeremy Gates

When the Citizens Advice Bureau reported a surge in the number of people seeking help and advice about soaring energy bills, it posed a challenge to the Big Six fuel suppliers as winter's chill looms.

The CAB confirmed a 46% rise against this time last year, while price comparison website uSwitch.com estimates that 5.2 million households - out of a total of around 27 million - are living in fuel poverty, against four million only 18 months ago.

Even among consumers able to pay the bills, dismay with energy prices runs deep: uSwitch figures show that energy prices rocketed by £381, or 42% in 2008, and have fallen during 2009 by only £54, just 4%.

Since January 2008, the average household energy bill has climbed from £912 to £1,239 - a 36% rise. Many households only absorbed the shock by making big savings on mortgage repayments.

But a move which could set energy prices tumbling has come from a minnow among suppliers: Ovo Energy, based on a farm estate of the Royal Agricultural College, near Cirencester, Gloucester, began supplying customers on September 1.

Co-founder Stephen Fitzpatrick says consumers signing up to one of its tariffs will save an average £225 per year, an important sum in households hit hard by recession.

Ovo's dual-fuel standard tariff - the New Energy Plan - means an average customer will pay £921 per year, against the average standard tariff of £1,141. This figure applies to dual-fuel customers - taking gas and electricity from the same firm - who pay by direct debit.

Mark Todd, director at energyhelpline.com, reckons this is great news for consumers.

"Energy prices are on the way down. The UK market is being turned on its head by two new upstarts," he says.

"Ovo Energy is a small supplier, only launched this year. The second cheapest is another small UK supplier, First: Utility.

"These two are taking advantage of extremely low wholesale prices to undercut the Big Six. There is a growing trend to switch to these new suppliers."

Todd thinks one million customers could switch to Ovo and First: Utility in the next year.

Phil Levermore, managing director and founder of another small energy supplier, Ebico, also welcomes Ovo's move.

"I think many people are very upset that the Big Six aren't doing anything to reduce prices. At last people realise there are alternative suppliers, if they can be bothered to track them down," he says.

Ebico, which has gathered 55,000 customers since launching in 1999, makes no standing charge - and charges the same for power regardless of payment method. It is particularly popular with housing associations and social landlords, who might have tenants otherwise paying much higher prices on prepayment rates.

Because there is no standing charge, Ebico can also offer big savings to low energy users.

Ebico, self-styled "the UK's only not-for-profit energy supplier", leaves bigger rivals trailing in a survey of customer satisfaction with utilities in the autumn special of Which? Money magazine.

But perhaps it needed the Ovo move to remind customers that they ignore smaller suppliers at their peril.

Tom Ryan, energy expert at uSwitch.com, says both newcomers have set out to differentiate themselves from the competition.

"First: Utility was the first supplier to offer all customers the chance to get a smart meter installed, putting householders in greater control of energy usage," he says.

"Ovo's energy is 15% renewable, and they are positioning themselves as the UK's cheapest provider too. This is exactly the type of shake-up the market needs."

The big question now is whether the Big Six will retaliate - and, indeed, whether they want to.

"New suppliers are taking advantage of very cheap electricity and gas prices, roughly half the level of a year ago," Todd says.

"In contrast, big suppliers who signed contracts two or three years in advance of delivery to guarantee supplies could be working through very expensive pipelines of gas for months to come."

The Ovo deal is not weighted heavily in favour of online users, unlike other firms' cheaper tariffs.

Although it requires consumers to take a monthly email statement, the company accepts telephone enquiries and even welcomes callers in person at its Cirencester HQ. Good customer service is a key part of the Ovo strategy, devised by co-founders Fitzpatrick and Kris Black.

Those who sign up to the Ovo deal face a cancellation fee of £30 per fuel if they want to get off the New Energy Plan within a year.

"Over the past 12 months, we have worked at creating the most efficient operating platform which we can: keeping costs down, buying energy at the best prices and passing on savings as soon as possible," says Fitzpatrick.

"Where wholesale prices fall, we will pass on savings as quickly as we can. We also believe our billing structure will detect if the monthly direct debit has been set too low, and needs to be increased to avoid consumers running into large debts."

Ovo's New Energy Plan even scores highly on 'green' credentials too: 15% of the electricity it will supply will come from renewable energy sources, roughly three times the national average. It thus meets the Government's target, of 15% by 2020, with 11 years to spare.

Ryan says sky-high energy prices can't be blamed entirely on the greedy Big Six.

"Nobody, including me, really understands what prices the larger suppliers have been paying for fuel they pass on to consumers," he says.

"Some of them would probably argue that by signing up to the prices which they accepted last year, they protected consumers from bigger price rises during 2008. It is really down to the Big Six to explain their costs, and to show why they have not been able to cut prices earlier."

Ryan thinks energy markets face an "interesting time".

"For the next four or five months, I expect suppliers to jostle each other with cheaper tariffs. I expect further decreases on online tariffs, but I do not expect decreases on standard tariffs.

"There will probably be no rewards for customers who show loyalty to long-established suppliers. This is a real opportunity for consumers to shop around."

The standard uSwitch advice to consumers who want to cut energy bills is to take three steps: choose a dual-fuel supplier; pay by monthly direct debit; and choose an online tariff.

As it stands, British Gas's Websaver tariff is not too far out of line with Ovo.

But the nature of the energy market means that consumers who try the cheapest supplier are not taking any great commercial risk: at worst, if companies failed, they would lose a month or two of direct debit payments.

"Regardless off who the supplier is, everybody still gets supplies through Transco or National Grid, and there is no danger of supply being cut off," Ryan says.

"Although savings may vary according to the amount of energy actually consumed, it is hard to resist any supplier combining quality service with competitive tariffs."

:: Information: uSwitch.com (0800 093 0607 and www.uSwitch.com); Ebico (0800 096 634 and www.ebico.co.uk); energyhelpline (0800 074 0745 and www.energyhelpline.com); Ovo (0800 599 9440 and ovoenergy.com).

Poundnotes

:: Woolwich has trimmed mortgage rates by up to 0.5% on new two, three, five-year and buy-to-let mortgages, its fourth reduction in two months, raising hopes rivals could soon be forced to follow.

Hannah Mercedes-Skenfield at moneysupermarket.com says: "The really good news is that borrowers with higher loan-to-value (LTV) requirements (up to 80%) are also set to benefit."

However, Francis Ghiloni at realpricecomparison.com says the average best-buy fixed-rate deal is still more expensive than in March this year. The average on two, three and five-year fixes then was 4.37%, against 4.9% today.

"Lenders have a long way to go before rates are even back to where they were in March," he says. "It is clear that 75% LTV lenders can afford to cut rates while still being entirely responsible."

The website reckons the lowest tracker and discount rates at 75% LTV come from HSBC and ING Direct, with rates ranging from 3.1% to 3.8%. Best fixes are available from Mansfield BS, RBS, NatWest, Darlington BS, Chelsea BS and Britannia.

:: Families taking a half-term break in the sun have been hit by soaring prices, claims a survey by Santander Cards, which reckons half-term breaks are 104% more expensive, on average, than holidays taken a week later.

Looking at prices facing a family of four in five autumn sun destinations - Lanzarote, Gran Canaria, Florida, Sharm El Sheikh and Crete - Santander reckons a Lanzarote-bound family leaving Gatwick in half-term could pay £5,486, against £1,572 a week earlier.

A family flying from Manchester to Sharm El Sheikh pays £6,545 in half-term, against £2,433 the previous week.

Only on the island of Crete were prices anywhere near the same - the premium might be as low as 18% there, says Santander.

"Parents with children of school age face a massive premium if they take children away during the half-term break. It is not surprising some families would rather go away during term time," says Emma Roberts, director of Santander Cards.

Whenever they go, families can't fail to benefit by using the Santander Zero card - because it levies no foreign exchange fee on spending abroad.

:: With nobody really knowing where world stock markets are going, Nigel Callaghan at financial advisor Hargreaves Lansdown reckons that any worker nearing retirement might be well-advised to reduce the equities in their pension and get into cash instead, following jumps in the value of UK Equity and Managed funds of 47% and 31% respectively since March's low point.

"The risk of markets losing ground is at least as great as there being further upside. Falling funds will inevitably mean a smaller retirement income," says Callaghan.

However, workers who turn pension pots into annuities at this stage might be dismayed to see that annuity rates have been "drifting sideways" since the end of the summer, and Callaghan says the benchmark annuity rate for a 65-year-old has dropped to under 7% this month for the first time in two years.

Hargreaves Lansdown enquiries: 0117 900 9000 and www.H-L.co.uk.

:: Where can savers be certain to get a decent return on their money, if UK interest rates stay at rock-bottom levels for the next couple of years?

One answer might be the F&C Managed Portfolio Trust, where manager Peter Hewitt says the big advantage is that trusts have a pot of money to pay income even at times when the underlying holdings might be trimming dividends.

In his portfolio, he has three Asian income trusts - Aberdeen Asian, Henderson Far East and Schroder Oriental - which are nicely insulated against disasters in the UK and US economies.

Closer to home, Hewitt also has holdings in Perpetual Income & Growth IT (PIGIT) and Temple Bar, an "out-and-out-value investor which has outstripped FTSE All-Share".

If you get a financial advisor to handle your investment, you can avoid initial commissions usually charged by the fund manager.

:: High-five savers:

Phone No Rate Account Period Deposit Interest paid

Yorkshire BS 0845 1200 840 5.30% (F) Fixed Rate Bond 31/12/14 £100 Yly

Barclays via branch 5.25% Savings Bond 46 Five Year Bond £500 Yly

West Bromwich BS via branch 3.63% Branch Bonus Instant £100 Yly

Investec Bank 0845 366 6333 3.37% High 5 Three Month (P) £25,000 Mly

Citibank www.citibank.co.uk 3.30% Flexible Saver 6 Instant £1 Mly

:: Top-five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC (Rem) 0800 494999 1.99% discounted for two years 60% £1,199 Yes

First Direct (Rem) 0845 610 0100 2.99% variable for term 60% none Yes

ING Direct (UK) 0845 603 8888 3.09% for term 75% £695 Yes

Co-operative Bank 0800 633 5286 3.24% to 30/01/13 75% £995 Yes

The One Account 0845 610 1060 3.75% for term 75% none Yes

Code:

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).