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Power Companies Urged To Pass On Energy Savings
Britain’s ‘big six’ energy companies refuse to pass on savings made by falls in wholesale prices. Photograph: Matt Cardy/Getty Images Photograph: Matt Cardy/Getty Images
Britain’s ‘big six’ energy companies refuse to pass on savings made by falls in wholesale prices. Photograph: Matt Cardy/Getty Images Photograph: Matt Cardy/Getty Images

Why do the big six energy providers still refuse to pass on price falls?

This article is more than 9 years old
Wholesale prices have fallen but so far only British Gas has followed suit – and that’s only because the government slashed environmental regulation

Britain’s big six energy providers are once again refusing to cut bills despite the dramatic fall in wholesale gas and electricity prices over the past year – leaving households struggling to cope with the typical £1,400 a year cost of heating and lighting a home.

Since last December, the wholesale prices of gas has fallen from 72p a therm to under 42p – and in April hit a two-and-a-half year low. Have these falls been passed on to customers? The depressing reality is that the opposite has happened – most are having to pay around 5% more than they were last year.

The fall in wholesale gas prices has come as a surprise to energy markets. Political instability in Ukraine has usually been accompanied by increases, with many of the pipelines supplying key European markets crossing the territory from Russia.

But apart from a short-lived spike in May, following fighting around Donetsk, it has continued to fall.

The gas price has historically tended to track the oil price. This has also fallen heavily over the past year, from $116 a barrel to $103, despite the gruesome political situation in the Middle East. Again, in the past, fighting in Iraq (still a major oil supplier) has tended to push the oil price up.

Fracking in the US has sharply reduced American demand, while at the same time a mild winter in Europe left stocks at relatively high levels. What’s more, renewable energy is now providing one-fifth of the world’s electricity supply. So why, amid all these factors, are the UK energy providers still refusing to reduce prices?

In June, Ofgem wrote to the “big six” asking them to explain this, pointing out that, at the time, wholesale prices for gas and electricity had fallen 38% and 23% over the previous 12 months.

It also pointed out that forward prices – which critics say the companies like to quote when it suits them – were around 16% and 9% lower for next winter, due to healthy gas imports and unseasonably warm weather over the past six months.

Ofgem said this week concerns that savings weren’t being passed on was one of the reasons it has proposed a referral of the energy market to the Competition and Markets Authority for investigation. At the very least, argue critics, the “big six” should now be reversing the price increases they imposed in autumn and winter last year.

On 23 November 2013, British Gas, which still leads the industry, raised prices 9.2% – adding £120 to the typical customer’s annual dual-fuel bill. At the time, it blamed the cost of buying energy on the global markets, delivering gas and electricity to customers’ homes, and the government’s “green” levies.

Npower raised prices in February by 7.8%; SSE upped them 4.2% in March, with ScottishPower up 5.3%; EDF 3.9%, and E.ON 3.7% in January. However, British Gas did cut bills by 3.2% in December after the government cut environmental obligations. However, none of those companies has passed on wholesale price falls.

Energy UK, which represents the big providers, says that “end consumer prices may not always reflect changes in wholesale market prices as companies buy electricity and gas, weeks, months and sometimes years, in advance as well as on the day-ahead market.

“This means electricity we are using today was probably purchased by the energy company months previously when the price was different. This helps protect customers from short-term fluctuations in price.

“As a result, changes in customer prices will often reflect long-term trends, not short-term ones.”

Some companies are refusing to drop prices ahead of the election, fearing a price freeze imposed by an incoming Miliband-led Labour government.

Last week, Paul Massara, head of npower, responded to Ofgem, blaming the Miliband policy as the reason he would not lower bills.

“The political and media pressures at the moment make it more difficult to reduce prices and then increase them again next spring,” he wrote.

“Then we are acutely aware that if the Labour party were to implement their proposed price freeze, we will be living with the consequences of our standard rate tariff price for a very long time and beyond the level of risk that we could manage in the wholesale market.”

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