Energy direct debits Money back & payments lowered

Paying by monthly direct debit cuts bills by 5-10%. Sounds good. and it is! Yet direct debits are based on an estimate of your usage, and if they get that wrong, you can be overpaying month after month.

This is a step-by-step guide, including template letters, to lower direct debits and get overpaid cash back.

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How they 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 measured in kilowatts 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 MONTHLY direct debit, the company supposedly estimates your annual usage and then divides it by 12 (or sometimes by ten) 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.

  The problem is 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.

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...

This short term thinking is damaging to the energy industry as well as consumers. 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. Here you pay depending on what you've just used, but the price is then higher as you won't get a discount.

Direct debit is usually cheaper

While there are problems, there is one important fact in its favour. A monthly direct debit is usually up to 10% cheaper than any other way of paying.

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 & saving £100s. If you've never switched before, savings of £250+ are possible if you opt for a cheap online tariff. Savings of 10% are still possible, even if you've switched before.

• Always give meter readings. Provide your supplier with regular meter readings and it will always give you a more accurate bill. Don't, and you may find you're paying for high estimates.

Know your rights

After years of consistent complaints (see the Ofgem listening? blog), Ofgem 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 give a clear explanation for the basis of the direct debit amount.

• Refund credits. If a credit has accumulated and a customer requests it back, suppliers must refund it. If the supplier thinks the credit should be withheld, the reasons why must be clearly explained but you can challenge this (see below).

In theory, this should make it much easier for consumers to get fair direct debits set and reclaim refunds where due. As this is a licence condition, if suppliers breach it, Ofgem has the power to fine. 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 does not set out what's fair and reasonable, leaving 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 (at article end).

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 sales people offer to beat your current direct debit payment if you switch.

This is a devious trick too, 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.

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

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 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 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 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 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. Maybe 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 the supplier's not lowered the amount 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 hand 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 up 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 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 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 displays, many energy companies have payout policies.

Yet remember these are just the suppliers' policies, what they will give you without you asking. You've a right to the whole amount unless the supplier can give a decent reason otherwise.

Call up 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 (Step 5).

Step 3. Call to 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, but paying off the debit 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 can get a shock at the end of the year, with a big catch-up bill. If unsuccessful, see the next step.

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 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 Ombudsman Services for Energy. 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 to just cancel your direct debit. If there's any argument the new statutory consumer group Consumer Focus says: "Consumers can also cancel a direct debit at any time".

The energy company should give you an overpayment refund but your energy price will rise without direct debit. So why not compare gas and electricity to see if you can save elsewhere.