Energy direct debits

If you pay for energy by monthly direct debit, watch out! Across the UK gas and electricity customers are having payments pumped way beyond the amount used, and suppliers WON’T lower them. Not surprising as by doing this nationwide, they’re holding excess millions and earning stacks of interest.

It’s time to fight back, and this is a step by step guide including template letters to lower your direct debit and get your cash back.

• How they grab extra cash
• Direct debit is cheaper
• Check your situation
• How to fight back
• Ask for money back
• Lower the debit

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How not to burn money

How they grab extra cash

First it’s important to be clear the price you’re charged and the amount you pay aren’t the same thing.

• The price of the energy

  Power costs are set by suppliers, usually they’re a combination of a daily ‘standing charge’ plus an additional amount based on energy used measured in kilowatts/hours.

  Therefore this is the figure, that after all's said and done, your energy actually costs. The lower the rate and your usage, the less you owe.

• What you pay

  With MONTHLY direct debit, the company supposedly estimates your annual usage and then divides it by twelve so you pay that each month. Thus in summer, you’ll usually build up a credit as you use less but this’ll be needed for winter months.

  The problem… some bills are massively overestimated as the amount paid seems to have been delinked from the cost of the energy you actually use. Many feel their suppliers set the rate willy-nilly.

  If you overpay you often need to wait until the end of the year to claim it back, underpay and you’ve to make up the difference.

Discrepancies between price and payment can bizarrely mean people move to a cheaper company but end up paying MORE each month because the direct debit’s set too high. To help here’s an example...

Beccy Tricity’s been with her company for ten years and her £80 a month direct debit is set to about the right level. Yet she rightly does a comparison and finds that that supplier EnergyMonster is 10% cheaper; so she’d expect to pay £72 a month.

However, EnergyMonster sets its direct debit at a mammoth £100 a month. Therefore for a year, she’s overpaying by nearly £40 a month and can’t change it. Of course in the end she’ll get the money back, and will have saved, yet in the meantime the overpayments mean less cash in her pocket.

This short term thinking is damaging to the energy industry as well as consumers, as it's a huge disincentive for people to switch, which ultimately stops them winning new business and stops consumers saving cash.

It’s important to note, this doesn’t happen with QUARTERLY direct debits; there you pay depending on what you’ve just used, but the price is then higher.

Won’t they just lower it?

Sadly, reports are emerging that many energy companies simply aren’t willing to lower overly high direct debits. Plus even at year-end if you’ve massively overpaid and it’s giving you a credit, it doesn’t automatically lower direct debits for the next year.

Make no mistake: you’re effectively subsidising their costs. With their billions earned annually, they DON’T need this help. And in today’s hard times, it means you’ve LESS cash in your pocket and can’t access it. One MP’s even said this is done deliberately to support their cash flow.

Worse still, the monster 50% plus 2008 price rises meant a great excuse to pump up direct-debit payments.

Too low is a problem too

While this guide focuses on overly high direct debits. The other worry is they’re set too low. This often happens when sneaky energy sales people are offering to beat your current direct debit payment if you switch to them.

This is a devious trick too, as lowering the direct debit doesn’t lower the cost, it just means you’ll pay less a month then get a huge bill at the end of the year which you may not expect and will be chased for.

Always compare based on the cost of units and standing charge. If this has happened to you, it's worth doing an energy comparison first to check you’re on the right tariff, then if you are, using the info below to increase rather than decrease the payment.

Direct debit is cheaper for some…

Yet while there are problems, there is one important fact that’s in its favour…

A monthly direct debit is usually at least 10% cheaper than any other way of paying.

Therefore, it’s generally the right MoneySaving option (see the Gas & Electricity guide), yet it’s important you understand how it works before taking it up.

I nearly threw my sock at the PM…

When the Prime Minister publically urged more to pay like this, I nearly threw my sock at the TV. He said it without any caveats, making it sound like a win-win situation. In truth, at the very least it’s crucial to warn people to do regular meter readings, and sadly in recent times he should’ve been aware of the problem of overcharged direct debits.

This worry isn’t something new, in July 08, after huge complaints in the Forum, I warned regulator Ofgem about this mammoth issue (see Ofgem is listening? blog). Yet neither it nor the government’s done a thing, so it’s time to take matters into our own hands.

NIAUR and CER, NI and Ireland’s regulatory bodies are doing marginally better, with investigations already started. However as the majority of energy companies are English based this has little impact on the bigger picture.

Check your situation

There are a number of direct debit overpayment scenarios and all require handling slightly differently.

• It's announced it's increasing the direct debit

  It’s possible you’ve received a letter telling you the direct debit has increased. This isn’t unreasonable as over the last year as gas prices alone have upped by 50%. If possible arm yourself with the price rise data from the gas & electricity switching guide.

  Yet if you think the increase is disproportionate it’s best to handle that before the new level is in place.

• It's put up the direct debit without telling you

  Under the Direct Debit Guarantee the supplier must tell you of any changes to your direct debit at least 10 working days before it's debited. It might do this by writing to you or include a notification on your bill.

  If it doesn't, this is an error, you should complain, ask for compensation and under the guarantee you can claim the extra cash from your bank.

• You switched supplier

  Outrageously, some who have switched to a supplier that’s supposed to be cheaper, find their direct debit set at a higher level, which is counter logical. Your new energy company will often justify this by saying it doesn’t yet know your usage so it’s gone higher to make sure.

  Here the best thing to do is arm yourself with knowledge of your past direct debit level and how much in-credit you were before contacting it to attempt to re-arrange the debit.

• The current direct debit is too high

  There are many scenarios where this may’ve happened... your house is more energy efficient; you’ve been overcharged for a long time without noticing; or you’ve been paid back a substantial credit over the last year, and it’s not lowered your debit.

  The obvious evidence here is being substantially in-credit. The only complication is the 2008 price rises, which do mean some increase in direct debit over the last year will have been reasonable. If possible arm yourself with the price rise data from the Gas & Electricity switching guide.

How to fight back

Outrageously there is no right to demand that your direct debit is set at a decent level. Something the government must change, but don't hold your breath.

Yet there are still ways to fight back…

Step 1. Always do a meter reading

DON’T let the company rely on its estimates, that’s just a great excuse for it to set the direct debit higher. Keep it as accurate as possible. The info on how to read your meter will be on the back of your bill, usually it’s just a case of calling up an automated answer system.

Unless you’ve been giving regular meter readings this process is much tougher. If you’ve never given a meter reading before and have been relying on estimates, then do the reading and wait for the updated bill before even attempting to ask to have the debit lowered.

Step 2. Ask for your money back

In itself, being in credit on your bill doesn’t mean the energy company is doing anything wrong. Energy usage is seasonal, so it’s expected that from summer until the winter bill you may’ve racked up some credit.

Yet if you’re heavily and disproportionately in-credit, before even beginning to talk about lowering the direct debit, try and get a chunk of the amount you’ve overpaid back. As the table below displays, many energy companies have pay out policies.

Yet even if you don’t hit that, there’s nothing wrong with asking for overpayments back.

Step 3. Request a lower Debit

You have a right to request an explanation of why your debit is set at a certain level, so call up and do so. If you’re always in-credit and it isn’t just seasonal, politely request the direct debit be lowered to reflect your ACTUAL annual usage and meter readings.

It's possible you may have a small debit on the account too, in this case paying a £20 debit balance to bring the account to a zero balance is likely to give you more leverage when re-negotiating the direct debit. Customer service staff may sometimes be limited in what they can do due to their PC systems, paying off the debit may allow them to do more for you.

Do remember electricity and gas companies rightly should err very slightly on the side of overpayment rather than underpayment, as otherwise you can get a shock at the end of the year, with a big catch-up bill.

Step 4. Formally request the direct debit’s lowered

At this point, you’ve gone through the usual protocols, and it’s here where you have to make it not worth the energy companies time to continue to make you overpay.

Therefore writing a formal letter indicates you’re taking it seriously and unwilling to let it lie. Write to indicate your direct debit is set too high, it breaks the Energy Retailers code, and threaten if there’s no change, you’ll ditch and switch.

The following draft template letter is a good start point:

Step 5: Complain to the Ombudsman

If your supplier still won’t budge and it’s failing to treat you fairly, or you think you’ve been billed incorrectly, try the Energy Ombudsman. It’ll check your supplier has stuck to the industry’s code of practice and can award compensation if not.

As an alternative, the nuclear option is just cancel your direct debit, and if there’s any argument the new statutory consumer group Consumer Focus says “Consumers can also cancel a direct debit at any time”.

Then the energy company should give you an overpayment refund; your energy price will rise without direct debit, though. So why not compare gas and electricity to see if you can save by doing this.