Consumers in energy debt

Recent Ofgem figures reveal that 2 million consumers are now officially in debt to energy providers.

At the same time there has been a 33% increase in energy debt since 20041- the average amount of money owed by consumers to energy companies. But this is just the tip of an energy debt iceberg says uSwitch.com, as the figures only take into account customers on official debt repayment plans.

2 million energy customers are ‘officially’ in debt to their supplier and over 5,000 are disconnected each year

8% of those in debt owe their energy company more than £600, but 64% owe less than £100 and so could benefit from switching and could save up to £210

Average debt per customer has increased by 33% from £150 to just under £200

39% or 780,000 customers in debt are on Pre Payment Meters (PPMs) and over 333,000 were installed during 2006 to recover debt – even though the average cost differential between direct debit and PPMs has increased to around £120 for a combined gas and electricity bill

Huge discrepancy in how suppliers treat PPM customers: ScottishPower charges £31 less for paying through a meter than by paying on receipt of bill, but npower charges £108 more

PPMs are more commonly used by low income households, it takes them on average 22 weeks longer to re-pay an electricity debt

Energy debt is increasing in the UK according to uSwitch.com following a recent Ofgem report revealing that the average amount of money owed by consumers to energy companies has gone up by 33% from £150 in 2004 to just under £200 in 2006. The majority of customers in energy debt owe less than £100, but 21% owe between £100 and £300, while 8% are in the red by more than £600.

However, these figures are believed to be the tip of an iceberg as they do not take into account the number of consumers in energy debt who do not have a debt repayment programme set up. The report is also based on numbers at the end of 2006 before winter fuel bills had hit doormats, energy price decreases had come into effect, and before three successive base rate increases saw a greater squeeze on homeowners.

The official stats also suggest that a financial health warning should be slapped on PPMs. There were 5.8 million PPM customers at the end of 2006 compared with 4.7 million in 1997, a 23% increase, and the rate at which PPMs are being installed to recover debt is at a 5 year high. In 2002, 286,000 were installed for debt. This dropped to 243,000 in 2004, but shot up to a high of 334,000, equivalent to a 37% increase in 2006.

Overall, 39% of customers in debt – 780,000 – are on a PPM. But worryingly, last year 169,159 PPMs were installed upon request by customers who were not in debt. While it could be argued that a PPM will help them to monitor their energy usage, for many this will come at a cost. The average PPM customer will pay £56 more than a customer paying upon receipt of bill and £128 more than a Direct Debit customer. So those who have installed one as a budgeting tool are in fact in danger of damaging their budget instead.

While it takes 48 weeks (just under a year) on average to clear an electricity debt through a repayment programme, it takes 70 weeks – over 16 months – to clear a debt through a PPM. In addition, the average amount spent each week towards clearing a debt is far higher for PPM customers suggesting that their debts are far greater. A PPM customer pays £5.54 a week towards an electricity debt and £6.33 for a gas debt, whereas somebody on a debt repayment programme pays only £3.20 a week for their electricity debt and £3.47 a week for their gas debt.

More importantly, being on a PPM can put vulnerable customers at risk of actually being pushed into debt by their supplier because of back charging. 100% of gas customers are on Smartcard meters, which are automatically updated in the event of a change in pricing. However, in electricity there are still around 30% of PPM customers using token meters. Token meters are old technology and all suppliers have a licence obligation to replace these these meters with “smart ones” that do not require visits to be recalibrated as the price can be re-set remotely. Following concerns about the level of debt build-up resulting from delayed recalibration in March this year, 130 MPs slammed three energy suppliers – ScottishPower, Powergen and npower – for back charging 700,000 PPM customers.

This could be taken as evidence that suppliers have still not successfully overhauled their bad billing practices and are not identifying and helping customers falling behind on their bills quickly enough. In fact this is an area that energywatch has highlighted – in April 2007 it named and shamed British Gas for poor customer service and revealed that of 21,427 complaints about British Gas from October 06 – March 07, almost 15,456 (72%) were about billing.

The report also reveals that customers in debt are being denied a helping hand from suppliers in the form of energy efficiency information. Only 138,124, or 6.9% of the total number of customers in debt, were given information by their provider in 2006 that could help them take steps to reduce their energy consumption and therefore their bill.

Ann Robinson, Consumer Policy Director at uSwitch.com, says: “There is an alarming propensity for energy providers to push customers in debt onto prepayment meters – this is a cop-out as it is often their own poor billing and debt management practices that force consumers into debt in the first place. Rather than getting their own house in order and tackling the root causes of the energy debt, providers peddle PPMs which should carry a financial health warning. This is even more worrying when coupled with the fact that consumers in energy debt are not being given basic energy efficiency information that would allow them to take greater control and reduce their bills.

“Energy prices rocketed by £277 between 1st January 2006 and 1st January 2007, adding to price rises seen in 2005 but price cuts so far this year amount to just £84 .This has led to a near doubling of the numbers in fuel poverty since 2004 and makes the actions suppliers are taking to help their most vulnerable customers' more important than ever before.

“The key for all consumers is to ensure that they are paying the lowest possible prices for their energy. Unfortunately, there is a real danger that those on prepayment meters feel excluded from the benefits of switching and competition. Ofgem is currently running a campaign urging them to start taking part in the market because they have got so much to gain from doing so. This is absolutely the right stance to take. On average customers could save £210 by switching from their suppliers to the cheapest available dual fuel plan.”

How to Get out of Debt:

Avoiding it:

Ensure that you are getting the best deal from your supplier. Where possible move to dual fuel, pay by direct debit and sign up to an online plan.

If your supplier won’t allow you to change to their online plan, switch to one who will!

Make sure you review your energy bills regularly; at least once a year to ensure you are still on the cheapest available plan.

Keep on top of meter readings, to ensure your account(s) are billed accurately.

Dealing with it:

Don’t ignore it! It won’t go away, so act now.

If you have a prepayment meter with a debt of £100 or less, consider switching to another supplier as you could save on average £210; you may be able to get a cheaper rate so you can pay off your debt more quickly.

Ensure your energy account(s) are based on an up-to-date meter reading (and not an estimate). If your last bill was estimated, call your supplier to give them a reading.

If you are struggling to pay, ask your supplier to set up a debt repayment scheme.

Avoid changing to a prepayment meter if you can, as these can cost you more.

Take a few easy steps to lower your energy consumption and save money on bills. For further information visit: www.energysavingtrust.org.uk

Claim the benefits that you are entitled to:

There are many free products, services and grants designed specifically for older or vulnerable people, such as the government’s warm front programme or British Gas 'Here to HELP' programme. Contact your energy supplier to get more information.

Suppliers are obliged to offer certain services to specific customers such as those of pensionable age and those with disabilities. These customers are entitled to be on the

Priority Service Register which includes benefits such as quarterly meter reads for those unable to read the meter themselves, free gas safety checks for eligible customers and third party billing for those unable to manage their own energy accounts.

Everyone over 60 should claim the Winter Fuel Payment and there are many other benefits and grants to which you may be entitled. Call SeniorLine to find out more: 0808 800 6565.