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Switching Programme full business case sees rising cost

Steven Britton Steven Britton Senior Analyst
31st May 2019

The expected cost of delivering faster and more reliable switching to customers has risen, according to the Full Business Case for Ofgem’s Switching Programme.

Published on 14 May, the report indicates that present value direct costs to the industry have risen 28% to £425mn over an 18-year period, up from £332mn in Ofgem’s February 2018 analysis.

The programme is working to reform switching arrangements so that domestic customers will be able to switch supplier by the end of the next working day, with implementation to be in summer 2021. Non-domestic switches will have an extra 24 hours built in. Together with improvements to reduce Erroneous Transfers and other issues in switching, Ofgem believes its reforms will increase consumer confidence in the progress and perception of ease, prompting greater take up.

Costs have risen in a number of areas. One of the biggest impacts has been from the postponement of go-live by roughly six months, from the end of 2020 to mid-2021 (a decision made last year after the February impact assessment). This has increased costs by £27.8mn, while reducing the benefits case by £8mn due to delaying benefits to consumers.

Of a similar magnitude has been an additional £28.7mn that one of the existing system providers omitted from its previously submitted information, which Ofgem has not explained for reasons of confidentiality. Other changes include an extra £11.9mn as a result of plans being scrapped for the DCC to take over provision of the meter point enquiry service, and an additional £17.1mn for DCC and central costs for project management.

In recognition of the fact that switching rates have risen since the 2016 data used in its earlier analysis, and the fact that the default tariff cap had been implemented, the regulator revisited its assessment of direct consumer benefits. However, it stated that it remained satisfied that the estimated benefits from the earlier analysis remained a conservative estimate. This left the monetised benefit to consumers at £185mn-1,077mn; a reduction from the £227mn-1,069mn.

Ofgem went on to reiterate that, regardless of the direct or indirect impacts of the Switching Programme, the “key driver” for intervention would be the benefits of greater innovation and competition that it had not monetised. Additionally, it set out its view that a swift, reliable switching process was “essential” to an efficient market and would be an important consideration when lifting the default tariff cap.

The Full Business Case also included a more general review of the programme’s progress. Ofgem noted that licence changes to support reliability improvements would be in place by the end of July, with the preferred bidder having been selected for the registration and address services that make up the Central Switching Service. PwC has been appointed as programme co-ordinator, and licensed party assurance is in the process of being procured by Ofgem.

The regulator also acknowledged that it had allowed the DCC a maximum 12% margin for the Design, Build & Test (DBT) phase leading up to go-live, and that the company had set out its business case. This is to be baselined by the end of May and kept under review. Ofgem has also consulted on the Retail Energy Code Company’s budget for the new financial year and suppliers will be invoiced as funding parties. For this first year, the largest part of its costs will be for supporting the Programme Co-ordinator and assurance providers.

Lastly, Ofgem confirmed that it is advancing the programme into the DBT phase, where systems will be procured and the transition prepared for. This occurred on 14 May, delayed from the original planned date of 2 April. The regulator warned that this was only the first self-assessment milestone it would require parties to pass.

It is disappointing but unsurprising for an industry programme to see its projected costs rise. Ofgem continues to highlight the benefits consumers should see – which are substantial – but it is becoming less clear that they outweigh costs to the industry.

Cornwall Insight is launching a new service dedicated to helping market participants understand the Switching Programme and associated Retail Energy Code. For more information please contact Steven Britton on 01603 542126 or s.britton@cornwall-insight.com.