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The pros and cons of smaller energy suppliers

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05/05/2014
The 'Big Six' have long dominated the energy market, but competitive independent providers are becoming harder to ignore. Is it time to make the switch?
The pros and cons of smaller energy suppliers

Despite the potential to save hundreds of pounds a year on their bills by switching provider, energy customers remain notoriously disengaged.

The ‘Big Six’ providers – British Gas, E.On, EDF, Scottish Power, SSE and npower – have a staggering 95 per cent of the market tied up and the inertia of the British population is highlighted by the fact that two-thirds of consumers have never switched supplier.

This is despite the fact they could be saving an average of £204 per year by switching.

Regulator Ofgem has recognised the benefits of switching and has launched a new guide aimed at encouraging consumers to shop around for the best deal.

In addition, energy suppliers have pledged to cut switching times in half by the end of 2014. The process, which previously took around five weeks, should soon take just three days, without any disruption to service.

For customers looking to switch, the question is whether to opt for one of the smaller, independent companies – some of which have grabbed headlines recently by slashing tariffs – or stick with one of the well-known ‘Big Six’ brands.

We take a look at the pros and cons of big versus small in the energy world.

Going small

It is generally agreed that smaller players are more competitive on price.

Scott Byrom of comparison site ukpower.co.uk points out that independent energy firms are not obligated to meet certain licence conditions, such as the payment of green levies, which in turn allows them to offer cheaper tariffs.

At the moment independent providers First Utility and Ovo both have annual standard tariffs of less than £1,000. This is compared to npower’s chart-topping standard rate which would set biller payers back £1,299 a year.

Byrom says: “It’s not a case of one or two suppliers undercutting the ‘Big Six’. If you look at the top ten cheapest tariffs, only one or two will be from the big energy companies.”

Smaller energy providers also tend to provide better customer service, says Caroline Lloyd, energy spokesperson for GoCompare, though experiences vary from person to person.

Ed Kamm, chief customer officer of independent provider First Utility, believes this is down to the fact smaller players – which are not as tied up with generation or distribution as some of their larger counterparts – can focus more on their customers.

Staying with the big players

There are some advantages to sticking with the ‘Big Six’ suppliers.

Small energy suppliers are not required by law to offer the Warm House Discount rebates unlike larger energy companies. This means that if you are eligible for the discount, which is worth up to £140 for this coming winter, you may not get it if you go with a smaller player. 

Government pressure on larger companies, including some of the larger independents, also means they provide more ‘perks’.

British Gas calculates that it has installed 1.3 million smart meters to help their customers keep track of their energy use.

Ian Peters, managing director of residential energy at British Gas, explains:

“We’re doing more than any other supplier to help make energy more affordable for the nine million households we serve by helping them control and reduce the amount they use.”

According to Byrom, smaller players are also more likely to ask for payment in advance. While larger companies can accept payment in arrears, independents tend to have limited cash flow. Getting money in more quickly allows them to buy from suppliers more cheaply.

It could be also argued that smaller providers are more exposed to movements in the energy market, Byrom adds, but due to the fixed nature of tariffs wholesale price rises cannot be passed on to existing consumers.

The bottom line

The best tariff for you is determined by more than price, says Lloyd. Where you live, your requirements and other factors will determine which tariff is most suitable.

She explains: “While small energy providers shouldn’t be overlooked in favour of their more well-known ‘Big Six’ counterparts, they shouldn’t necessarily be favoured just because they’re smaller. Instead, find the tariff that suits your needs, at the best possible price, and do some research into the company’s service reputation before you sign up.”

Byrom says consumers should not get stuck on big companies because of name recognition.

“Gas is gas and electricity is electricity. There are other products where you might notice a difference supplier to supplier, but you’re never going to get home at the end of the day and think: wow, the way those lights came on is great,” he says.

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