The energy regulator has halved the number of rules governing the supply of gas and electricity to homes in the UK.

Ofgem has published the following press release:

Badly received

Many personal finance experts have been quick to criticise Ofgem for such an about turn since it published it's white paper on the 28 day rule in 2003, which can be found at http://www.berr.gov.uk/files/file20159.pdf.  In the white paper Ofgem said the 28 day rule would play "an important role in protecting the UK’s 45 million domestic energy consumers" also describing the rule as a "back door" allowing "consumers to extricate themselves from poor service or contracts".

Commenting on the decision Corin Vestey, the editor of Everyinvestor.co.uk, said, "This move by the regulator is a betrayal of consumers and of the principle of competition in the energy market".  Damian Clarkson also of Everyinvestor.co.uk even went as far as saying "Christmas has come early for energy suppliers, after the regulator gave them permission to lock customers into costly long-term contracts for the first time."

It's certainly true that there could be negative effects of suppliers being able to offer long-term contracts to domestic customers, particularly the possibility of customers being trapped in long-term contracts at high prices.  So what has caused such a drastic change in policy? Ofgem says the removal of the rules "balances improved protection for vulnerable customers and greater opportunities for innovation in the market", also adding that the removal of the rules will make it easier for new companies to enter the domestic market and challenge the 'big six' suppliers.

"We don't envisage that all companies would completely change their contracts so that every contract would be tying in people for a longer period of time, it just gives the market freedom to innovate," a spokesman for Ofgem said.

A chance for innovation

Smart meters could be bundled with Electricity & Gas contracts to help homes reduce their energy consumption

Ofgem's claim that the move will "clear the way for energy suppliers to offer more innovative products that could bring better deals to customers and environmental benefits" could actually have some good reasoning behind it.  The idea being that if a supplier can guarantee it will have a customer on board for at least 12 months, it can build the prices of any extra 'free' services being offered into the entire length of the contract, in a similar fashion that mobile phone line contracts cover the cost of an expensive handset over 12 or 18 months.

Extra services included could be anything from installing a smart meter to monitor energy consumption or providing other bundled services such as heating and boiler cover in the event of a breakdown.  These services of course cost money, and you can understand why suppliers would be unwilling to offer these extra services without charging for them in a single-upfront payment when customers can simply walk away to another supplier in 4 weeks time.

Business contracts

As any business utilities buyer or company director knows, fixed-term contracts have their advantages as well.  In the business market, companies must always secure their prices for a minimum of 12 months or face paying 'deemed rates' which are usually at least twice the standard contract rates.  Of course, if prices decrease just after you sign a fixed-term contract, you aren't going to be happy, but at least you know exactly what you are paying for the next few years.  This stability of price is not offered on any type of 'rolling' contract - your prices can go up or down at only 28 days notice from your supplier.

Utilities Solutions offers business electricity and gas contracts for periods of 12 months up to 5 years as needed, often finding that customers wish to secure their prices for 24 or 36 months, as energy has become such a large chunk of their company's overheads.  Many businesses also feel that reviewing supply arrangements every 12 months can be a time-consuming and costly measure, and therefore opt for contracts longer than the minimum 12 months.

When signing up to any fixed-length contract there is a risk involved, but there is also the stability of fixed prices, and in a volatile market the assurance of no further price rises can be more appealing than the possibility of a price drop.

Should I sign a domestic contract?

All customers should consider carefully any new contract they are offered and compare it with other similar offers from a range of suppliers.  One way to do this is to use a free price comparison service such as uSwitch.com - they compare all the suppliers in one place in an impartial manner and are certified by Energywatch, the consumer watchdog.

Remember, you don't have to sign a fixed-term contract if you don't want to, you can still switch your supply to another supplier on their standard tariff, but you may find that these new deals with their various additional offerings interest you as they roll out on to the market over the next few months. 

Most people already have a contract for their mobile and home phone lines, broadband, digital TV and other services as they offer more benefits to the consumer.  Some people however, prefer the flexibility of being able to drop their current suppliers at any time.  In the future domestic energy market, we are bound to see a range of new contracts, good and bad, but isn't this the same in any industry?

Now Ofgem have the challenge of ensuring fair practice and promoting competition amongst suppliers in the new simplified market.

Ofgem Press Release: http://www.ofgem.gov.uk/Media/PressRel/Documents1/Ofgem35.pdf

Sources: http://www.everyinvestor.co.uk | http://www.easier.com | http://uk.reuters.com

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