What makes some energy companies cheaper?
Suppliers agree on the wholesale price of gas many months ahead and the bigger suppliers are able to buy larger amounts and so get it cheaper per unit than smaller suppliers. But big suppliers have old complex billing systems, more customers to serve, and more demands from the government which increases their cost to serve customers.
Why are some companies cheaper than others?
The main reasons some energy companies are cheaper than others are that bigger companies have larger, more complex billing systems and more customers mean higher costs to serve them. There are some obligations on larger energy companies that smaller suppliers don’t have to provide to their customers. Also, buying larger volumes of fuel makes it to buy per unit.
Who are the ‘Big Six’ energy companies?
This refers to the biggest suppliers who until recently were British Gas, EDF Energy, Eon, Npower, SSE, and Scottish Power. The market has changed so much now that the term ‘Big Six’ isn’t relevant anymore and has stopped being used.
Recently Eon took over Npower and OVO Energy bought SSE to become the second biggest supplier in the UK. Octopus Energy has also come into the market and has made a huge impact in a relatively short time.
But why do all these companies have so many different tariffs and why are some companies hundreds of pounds cheaper than others? We shall look into it here.
Why are some energy companies cheaper than others?
Bigger companies have older complex billing systems
Serving millions of customers is not cheap and over the years, these suppliers have developed billing systems that are costly to maintain and upgrade. At a time when prices are so competitive, the smaller providers have an advantage in being agile and able to respond quickly to new practices.
More customers mean higher costs to serve them
The bigger suppliers have to cater for all types of customers: old, young, tech savvy and many that don’t even have a phone. Providing a service by many different channels mean the costs are higher for them too.
Less ways to contact customer service departments
Energy companies are notorious for long call wait times and this is the traditional contact method for most of their customers. Many of the smaller companies focus on online only and some don’t even provide a clear phone number to contact, relying on livechat or email instead.
Some suppliers want you to have only smart meters as this results in lower inbound customer calls. As smart meters provide accurate readings, customers don’t get estimated bills so they don’t need to contact energy companies as much.
This results in lower customer handling costs for the business needing less staff and other lower overheads.
Supplier offers less choice in payment methods
Some suppliers only allow Direct Debit as the payment method, as this is the cheapest payment method to administer and means cash is coming into the business at a quicker rate. Setting up a direct debit usually also means a credit check is performed where a company gets to analyse if you are likely to be a good payer.
Prepayment meters are the most expensive type of payment method to administer costing more to service than other type of meters, and the cheaper companies don’t like to take those customers on.
Small companies don’t offer the Warm Home Discount
Smaller companies aren’t obliged to offer the warm home discount if they are small – less than 250,000 customers. Some do offer it but only to the ‘core’ group of pensioners who receive the guarantee element of pension credit.
This saves them money and makes their prices cheaper. Most of the bigger companies also offer it to a broader group of vulnerable customers but this at their discretion.
Some suppliers don’t support smart meter readings
Not all suppliers can support smart meter auto readings, or may find it cheaper to ask customers to provide reads. It may work out cheaper for them not to use the communications systems for smart functionality if you don’t have to pay for it.
Due to higher training costs, they may also have fewer engineers to fit smart meters if you don’t already have one.
Offer a lower price to get more customers
Some companies price the tariffs lower to acquire more customers quickly, even if the price is not sustainable in the sort term. In the last couple of years many smaller companies have gone bankrupt trying to use this strategy.
Some companies give less support to vulnerable customers
Some companies may not put all relevant customers onto high priority/vulnerable customer groups as they could be with the more expensive suppliers. This can save money when you take into account the frequency of meter safety inspections, extra services for vulnerable customers, etc.
As you can see, there are many reasons why some companies can be cheaper than others for the same gas and electricity they supply to you. It is important you consider how these factors affect you and you can then either switch supplier or ask for a better deal from your current supplier. Citizen’s advice has some good information on help paying your bills.
How many energy companies are there?
There are more than 40 gas and electricity providing companies in the UK, but not long ago there were even more – over 70 companies large and small. The ‘Big Six’ energy companies still supply over 50% of UK households. But there are many smaller suppliers that are cheaper and attract customers with the price.
The process of switching suppliers is relatively easy as your gas and electricity do not switch off at the change date and no one comes to install their meters either. In fact, very little changes for you…except the price, which is usually the main reason why you wanted to switch.
The main reasons some companies are cheaper than others:
- Large companies have complex billing systems
- More customers mean higher costs to serve them
- Big companies have to provide many ways for customers to contact them
- Bigger suppliers have to cater to all types of payment methods
- Government policy requires some companies to fund discounts for certain customers
- Some companies provide better support to vulnerable customers.
*The information in this article should be used for general guidance only and not as financial or health advice. Full details are on the link in the footer to our disclaimer page. Always discuss your requirements with a competent and suitably qualified professional before undertaking any work.