Disengagement in the energy market leaves SMEs paying over the odds

energy market
© Andrey Popov

Rich Price, Managing Director, Tickd, explores why the energy market is broken for small business customers, leading many to switch less than they should, and how to rebuild it

SMEs are the backbone of the British economy – close to 6 million small businesses employ more than 16 million people in the UK, generating £2.2 trillion in turnover last year. Not only are they a major economic driving force, but they also play a significant role in job creation.

Despite this, small businesses have historically been underserved by the energy market, leading to them being disengaged, overcharged, often on out of contract rates, or staying with the same supplier for years on end. So, what can be done to support SMEs and restore their faith in the energy market?

SMEs are not well catered for in the energy market

SMEs, and more particularly, Microbusinesses, defined as those with up to ten employees which make up the bulk of the UK’s 5.8 million, sit in limbo. What’s more, the ‘S’ in SME presents a challenge, in which such businesses fall into a gap that make them difficult to serve. Often a Third-Party Intermediary (TPI) can’t make enough money from their relatively low usage to make them economical to serve, or, a minimum commission is added to cover the human involvement, which can result in uncompetitive costs for the small business.

Suppliers play a role in this by creating barriers to switch, only increasing the disengagement and the need for human involvement.

Although a small business owner may not know any more about energy, than a domestic customer, currently they have less protection available from the regulator. It is for this reason Ofgem recently announced its commitment to taking action and increasing the protection afforded to Microbusinesses.

This commitment is in the form of its Microbusiness Strategic Review which proposes additional measures giving that extra protection. These measures include obliging suppliers to only work with brokers who have signed up to an alternative dispute resolution scheme and follow a framework of requirements and a 14-day cooling-off period for microbusiness contracts.

Having recently concluded the policy consultation phase of this review, decisions are eagerly awaited and due imminently. Once known, Ofgem’s decision will inevitably result in significant implications for SME suppliers and brokers, increasing urgency to rebuild a broken energy market.

One area that Ofgem wants to hone in on is microbusinesses switching suppliers. In its consultation document, it explains: “We want microbusinesses to be able to move away from an old contract without facing unnecessary fees, obstacles or complications via a process that is smooth and swift.

“To facilitate that there shouldn’t be any unnecessary contractual barriers that prevent customers from switching suppliers. Any such barriers will cost microbusinesses time and money, lead to a poor consumer experience, and likely dissuade consumers from engaging in the switching process in the future.” To do this, Ofgem said improvement is needed in the area of what is required from microbusiness owners to be able to switch, including awareness of consumer rights.

These proposals, follow an earlier report that revealed small businesses had been overcharged by an estimated £2 billion because, unlike brokers selling mortgages or insurance, they were unregulated.

Rebuilding through digital transformation

With such disparity small business owners need a simple, transparent process to switch their energy, now, more than ever. Digital transformation is needed in the market to ensure there are less human ‘touch points’ in the comparison and switching process.

The cost to acquire small business customers is getting higher and higher, yet the changes on the horizon are going to make adding high uplifts more difficult to cover these costs. This will result in traditional telesales approaches to be less viable. Whilst a digital switching journey isn’t the ‘norm’ for small businesses at the moment, it is a case of ‘when, not if’ this is the case. The proposed changes are only going to fast track this process.

As SMEs seek to get a firmer grip on their outgoings, particularly in light of the current economic climate, it’s vital that such steps are being taken by regulatory bodies like Ofgem to ensure they’re supported – with additional help from companies to further facilitate faster, transparent switching to provide greater business value and rebuild trust within the energy sector.


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