Paying by monthly direct debit cuts bills by up to 6%. Sounds good, and it is! Yet direct debits are based on an estimate of your usage. If that's wrong, you can be overpaying month after month.
This is a step-by-step guide, including template letters, to lower your direct debits and get overpaid cash back.
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NEWSFLASH: FEBRUARY 2014Millions to get automatic refunds
Millions of energy customers who pay by direct debit will now get automatic refunds from their supplier, regardless of how much their account is in credit by.
Customers will get overpayments back each year on the anniversary of when they signed up, or when they switch tariff, after EDF Energy, British Gas, SSE, First Utility and Npower changed their direct debit refund policies. Previously, some firms only automatically gave refunds if customers were in credit by £100 or more. See our Millions to get refunds MSE news story.
How energy firms grab extra cash
First, it's important to be clear the price you're charged and the amount you pay every month 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, which is measured in kilowatt hours.
After all's said and done, this is what your energy actually costs. The lower the rate and the less you use, the less you owe.
What you pay
With a monthly direct debit, the company supposedly estimates your annual usage and then divides it by 12. So you pay that amount each month. In summer, you'll usually build up a credit as you use less, and you'll need this surplus for winter.
But some bills are massively overestimated, where the amount paid seems to have been de-linked from the cost of the energy you actually use. Many customers feel their suppliers set the rate willy-nilly.
Switched energy? Don't confuse direct debits with cost
Many can save £185 a year by switching (see our free MSE Cheap Energy Club), but bill confusion leaves many thinking they've not gained. However, it's mostly pointless switching at the moment, while we're in a round of price rises, unless you're moving to the cheapest fixed tariff for you. See our Cheap Gas and Electricity guide for more on top fixed deals.
It's actually possible to switch to a cheaper energy company, only to find your direct debit rises, as it's estimated wrongly. You'll get your money back through a refund later, so you'll still save.
Here's an example...
Beccy Tricity's been with her provider for 10 years and her £80 a month direct debit is set to about the right level. She rightly does a comparison and finds EnergyMonster is 10% cheaper; so she'd expect to pay £72 a month.
However, EnergyMonster sets her direct debit at a mammoth £100 a month. Therefore for a year, she's overpaying by £30 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.
The fact that people can end up with a higher direct debit, after switching to what they think is a cheaper supplier, is damaging to the industry. It's a huge disincentive for people to switch, which ultimately stops suppliers winning new business and stops consumers saving cash.
It's important to note this doesn't normally happen with quarterly direct debits. Here, you usually pay depending on what you've just used, but it costs more as you won't get a discount.
Direct debit is usually cheaper
While there are problems, there's one important fact in favour of setting up a monthly direct debit. It's usually up to 6% cheaper than any other way of paying.
However if you use heating oil to heat your home, instead of gas, it's different. Paying by direct debit won’t get you a discount. But it can be convenient as it allows you to spread the costs. Heating oil users can learn simple steps to save in our Cheap Heating Oil guide.
Therefore, it's generally the right MoneySaving option (see the Gas & Electricity guide), yet it's crucial you understand how it works before taking it up. For maximum savings, combine it with:
Switching to the cheapest tariff and saving £100s. If you've never switched before, savings of £185/year are possible if you opt for a cheap tariff.
Always give meter readings. Give your supplier regular meter readings and it'll always give you a more accurate bill. If you don't, you may find you're paying for high estimates.
Know your rights
After years of persistent complaints (see Martin's blog: Is Ofgem listening?), the regulator finally stepped in and introduced new licence conditions setting out guidelines for fair and reasonable direct debits.
Under condition 27 of the Gas Supply Licence, suppliers must:
Set fair direct debits. They must take reasonable steps to ensure customers' direct debit levels are based on the best available information, including the quantity of gas and electricity supplied.
Give clear explanations. If you ask, your supplier must clearly explain why it's chosen that amount for its direct debit.
Refund credits. If a credit has accumulated and a customer asks for it back, suppliers must refund it. If the supplier thinks the credit should be withheld, the reasons why must be clearly explained but customers can challenge this (see how to challenge it).
In theory, this should make it much easier for consumers to get fair direct debits set for them and reclaim refunds where due. As this is a licence condition, Ofgem can fine suppliers if they breach it. However, the onus is still heavily on the consumer to fight unfair direct debits and it's the consumer that must demand a refund. It won't happen automatically.
Annoyingly, Ofgem doesn't set out what's "fair and reasonable". Instead, it leaves it up to the supplier to decide. If you disagree and the company won't sort it, you can go to the free, independent Energy Ombudsman to dispute it (see Energy Ombudsman).
Low direct debits can be a problem too
While this guide focuses on excessive direct debits, the other worry is when they're set too low. This often happens when sneaky energy salespeople offer to beat your current direct debit payment if you switch.
This is also a devious trick, as lowering the direct debit doesn't lower the cost. It just means you'll pay less each month, then get a huge bill at the end of the year which you may not expect and will be chased for. If the debt gets too high, you may not be able to switch.
Always compare based on the cost of units. If this has happened to you, it's worth doing a comparison on Cheap Energy Club to check you're on the right tariff. If you're on Economy 7, you can still compare tariffs. (See our Economy 7 guide for full information.) If you're already on the best tariff, use the info below to increase your payment, rather than decrease it.
Check your situation
There are a number of direct debit overpayment scenarios. All need 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 in past years gas prices alone have risen by 50%. If possible, arm yourself with price rise data from the Cheap Gas & Electricity guide.
If you think the increase is disproportionate, it's best to deal with 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 should normally tell you of any changes to your direct debit at least 10 working days before it's taken out of your account. It might do this by writing to you, or by including a notification on your bill.
If it doesn't, this may be 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 firm will often justify this by saying it doesn't yet know your usage so it's gone higher to make sure usage is well covered.
Here, the best thing is to arm yourself with knowledge of your past direct debit levels, and how much in credit you were, before contacting it to attempt to rearrange the debit.
The current direct debit is too high
There are many scenarios where this may have happened. Maybe your house is more energy-efficient, or you have been overcharged for a long time without noticing. Or maybe you've been paid back a substantial credit over the last year, but the supplier's not lowered the amount it demanded.
The obvious evidence here is being substantially in credit. If possible, arm yourself with the price rise data from the Gas & Electricity switching guide.
How to fight back
While there are certain guidelines suppliers must adhere to, it's likely you'll still have a fight on your hands to get your cash back. After all, while it has your money, it can earn stacks of interest.
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 to set high direct debits. Keep it as accurate as possible. The info on how to read your meter will be on the back of your bill, or look online. Usually it's just a case of calling an automated answer system.
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 between summer and winter, you may have racked up some credit.
Yet if you're heavily and disproportionately in credit, then before even beginning to talk about lowering the direct debit, try to get a chunk of the amount you've overpaid back. According to Ofgem, suppliers must refund an accumulated credit, though it doesn't say what it thinks is fair. As the table below shows, many energy companies have payout policies.
Remember, these are just the suppliers' policies - what they'll give you without you asking. You've a right to the whole amount unless the supplier can give a decent reason otherwise.
Call and ask for your cash back. Quote condition 27 of the Gas Supply Licence, which states credits must be refunded and direct debits fair. If it won't reset it, you're entitled to a full explanation, and you can complain to the Ombudsman (see step 5).
|Providers' refund policies (correct at 25 Feb 2013)|
|Provider||Credit refund policy|
Now gives automatic refunds on any amount you've got in credit. Previously it only offered automatic refunds of sums of £100 or more. British Gas also allows you to go online and adjust your direct debit. More info
At your annual review, if your account is more than £5 in credit and it has an up-to-date meter reading, you'll get an automatic refund. More info
Will begin refunding customers automatically if they're in credit by £5 or more. This will happen later this year. Previously it only offered automatic refunds of sums of £60 or more. More info
If your actual meter readings show you have more than three months' worth of direct debit payments at the time of your annual review, it'll automatically refund this amount.
It also pays £1 on every £33 above £100 you're in credit, on balances up to £500. This sum, which can be up to £12, is paid when your direct debit is reassessed each year. More info
Provided it has an up-to-date meter reading, EDF now gives automatic refunds on any 'in-credit' amount. Previously it had to owe you £75 or more before it gave an automatic refund. More info
Now gives automatic refunds on in-credit cash of £5 or more. Previously it'd have to owe you £100 or more. More info
Step 3. Call to ask for a lower debit
You have a right to ask for an explanation of why your debit is set at a certain level, so call up and do it. 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 debt on the account too. In this case, paying off a £20 debit balance to bring the account to zero is likely to give you more leverage when renegotiating the direct debit. Customer service staff may sometimes be limited in what they can do due to their computer systems, but paying off the debt may give them leeway.
Do remember electricity and gas companies rightly should err very slightly on the side of overpayment rather than underpayment, as otherwise you could get a shock at the end of the year with a big catch-up bill. If you're unsuccessful, see the next step.
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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 company's time to continue making you overpay.
Writing a formal letter indicates you're taking it seriously and you're unwilling to let it lie. Write to say 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 Ombudsman Services for Energy. It'll check your supplier has stuck to the industry's code of practice and can award compensation if not.
The energy company should give you an overpayment refund but your energy price will rise without a direct debit. So why not compare gas and electricity to see if you can save elsewhere? See our free Cheap Energy Club for more.