Energy bills mislead with phantom savings offers
Energy customers are being misled by savings offers on gas and electricity bills which never materialise, the BBC Money Box programme has discovered.
These phantom savings offers are being made to people on fixed-price energy tariffs and are a consequence of rules imposed by the energy regulator Ofgem.
People have been told of savings of up to £200 that never materialise. Up to a third of households could be affected.
Ofgem defended the system, saying it is the best option for comparing costs.
One EDF customer in Norwich found such an offer on the front of her November bill, under the heading "Our cheapest overall tariff".
"Over the next year you could save £42.08 by choosing Blue+Price Protection Nov17 with Direct Debit, our cheapest fixed electricity and gas tariff available for your meters," the message on her bill said.
But if this customer took the offer up and switched tariffs, Money Box calculated her true saving would be just £4.
Phantom savings can even turn into real losses. In one example analysed by Money Box, a £47 projected saving with Npower would actually lead to the customer paying £147 a year more than they now do.
How it happens
Energy suppliers make these offers because of licence conditions introduced by Ofgem in 2014 - rules that all energy suppliers must comply with.
A methodology stipulated by Ofgem and known as the personal projection lies at the heart of the problem.
The personal projection is a forecast of the amount a customer would spend on energy in the year ahead if they fail to switch when their current fixed term tariff expires.
A failure to switch means customers are automatically put on their supplier's usually much more expensive standard variable tariff (SVT) reserved for people who rarely or never change suppliers or tariffs.
So a customer nine months into a cheaper one-year tariff will have a personal projection made up from the remaining three months on their current tariff plus nine months on their supplier's SVT. This is stated, in part, on the bill.
The result is a personal projection which is usually much higher than the amount someone on a fixed tariff is actually paying.
Personal projection effect
One Npower customer with average energy consumption gets two different quotes from price comparison services:
In the Npower example cited above, the new tariff Npower is offering costs £870 a year, some £147 more expensive than the cost of the current tariff.
Owing to the higher cost of the SVT, the customer's personal projection is even higher - at £917 a year. That is why, using Ofgem's methodology, the customer is told they would save £47 a year.
The BBC has learned that in industry consultations before the personal projection methodology was introduced in 2014, Ofgem was warned it was likely to produce inflated savings offers.
Archna Luthra, of the MoneySavingExpert website, told Money Box: "We gave them a very clear warning about how damaging and misleading this calculation could be. Lots of people across the industry had the same concerns and voiced those concerns to Ofgem."
Florian Ritzmann, head of the energy price comparison app Voltz, said his warnings to Ofgem, that customers could end up losing money instead of saving, fell on deaf ears.
"At one particular meeting I remember Ofgem said: 'We have made our decision and it's time to move on'. And that was that," he said.
Voltz and MoneySavingsExpert are among a handful of energy price comparison sites which, along with TheEnergyShop.com, have found ways to stop using Ofgem's personal projection methodology. They now simply compare the cost of proposed tariffs with what customers currently pay.
Other leading energy price comparison sites still follow Ofgem's personal projection rules and so, for people already on fixed tariffs, produce inflated savings that will not materialise if people go ahead and switch.
In response, Ofgem said: "We believe the method we chose to calculate customers' personal projections was the best method for comparing people's energy costs over the following 12 months."
Ofgem is once again consulting the energy industry on what, if anything, will replace personal projections after it withdraws its current methodology some time next year.
You can hear the full story on Money Box on BBC Radio 4 at 12:04 GMT on Saturday 19 November, and repeated at 21:02 on Sunday 20 November