First cuts not the deepest – where now for UK’s hard-pressed energy customers?

It’s not an easy time to be an energy consumer, particularly not in the domestic market. Prices for homes are near recent record levels, while suppliers enjoy ever increasing profits on the back of falling wholesale prices.

The country is in recession, and we are coming through a harsh winter meaning that people are facing the choice between heating their homes, and keeping bills under control. On the markets, electricity and gas prices peaked in late summer 2008, since which time they have fallen by 60% and stayed low for the last year.

A succession of announcements from the ‘Big 6′ suppliers over the last month or so has caught the headlines. At the start of February, British Gas (the residential arm of Centrica) announced they would cut gas prices by 7% . Weeks later, they announced spiralling retail profits, sparked by the steadfast refusal to pass on cheaper wholesale costs to homes. They are not alone. Scottish Power saw profits rising by 8% , and haven’t cut electricity or gas prices for almost a year. Scottish & Southern Energy were the first to follow BG’s lead by announcing yesterday a token 4% cut in their gas tariff .  Even after this reduction, their gas prices remain 37% higher than at the start of 2008.

No-one denies that these companies should make a fair return – apart from anything else, they need to invest in our creaking infrastructure – over the next decade the country needs to find £200 billion to upgrade networks and power stations. However in the cold light of increasing poverty, higher profits and increasing returns to shareholders (leakage from the investment cycle) do not play well. 10% price cuts all round would have been fair.

Are we being ripped off? Industry regulator OFGEM records that profit margins at the ‘Big 6′ are increasing, and in fact rose 40% in the last quarter. The companies argue that they have had to buy far ahead on the wholesale markets, and so can’t pass on cuts. Come on guys – it’s been 18 months, and it took you a matter of weeks to pass on a succession of eye-watering double digit increases in 2008 when the markets rose. In addition, these vertically-integrated giants win either way – they have wholesale as well as retail interests. If market prices are high their retail margins could be low but ‘raw material’ profits rise. In a falling market, retail prices stay high and margins there make up for the falling wholesale returns.

Customers play second fiddle here, and competition isn’t working.  The ‘Big 6′ are so strong that new entrants can’t get a foothold in the market.  OFGEM and the government are starting to wake up to the need for reform, to promote real competition within a liberalised market where suppliers and new entrants both have a fair chance.  It’s a decade too late, as with many things, but let’s see what can be done.

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