Why are your energy bills getting more expensive? Gas and electricity suppliers face a committee of MPs to explain why prices are going up, despite a sharp rise in their profits.
Britain’s big six suppliers of gas and electricity faced a grilling from a House of Commons committee last week (2 February) when they were asked to explain why household bills are going up.
E.ON, EDF Energy, British Gas, Scottish Power, npower and Scottish and Southern Energy all came under fire from MPs on the Energy Select Committee – the inquiry panel set up to investigate the soaring cost of gas and electricity in the UK.
All six firms have announced price rises in the past few months, with EDF Energy the last to jump on the bandwagon, confirming its price rises earlier in February.
The investigation comes after Ofgem, the energy industry regulator, launched a review of the big six suppliers to ensure gas and electricity companies gave customers a fair deal. Ofgem raised the issue following the string of price rises for consumers, which came despite the providers' profit margins increasing by a reported 38 per cent between September and November 2010, on standard dual-fuel tariffs.
Energy market reform
The overall investigation into energy prices is also part of a wider plan for Electricity Market Reform (EMR). In December, the energy and climate secretary, Chris Huhne, said EMR would lead to a shift towards cleaner energy with a boost investment in low-carbon energy to allow the UK to cut carbon emissions by 34 per cent by 2020.
Higher costs for customers
In front of the select committee, the panel, which was made up of representatives from all the major gas and electricity suppliers, agreed that reform was necessary but said the biggest challenge they faced was to make sure they struck a fair balance between the interests of their shareholders and their customers.
Critics of the reforms, which move towards cutting carbon emissions and providing green energy such as wind and nuclear power, argue that the cost of implementing the proposals will be passed on to consumers in the short term with higher bills. Estimates suggest that typical household energy bills could rise by £500 a year in the near term.
Huhne admitted in December that energy prices would initially rise – but emphasised that by 2030, the cost of power will be lower than it would be without any reform.
The Energy Select Committee’s chairman, Tim Yeo, asked representatives from the big six outright: “Ofgem has told us that you have whacked up your margins recently. Is that true?”
Most of the providers’ representatives denied they were cashing in on consumers by ramping up gas and electricity prices.
Ian Marchant, the CEO of Scottish and Southern Energy said: “I wish that were true. Our gas supply business has lost money every year for the last five years. So, yes, we are seeking to make profits in this business. We are generally failing. This is not a business that is awash with cash, as people would like to think.”
John Campbell, director of energy wholesale at ScottishPower, and Sara Vaughn, director of regulation and energy policy at E.ON, echoed this, saying their firms had made very small profits in the last year and were making a loss in the two years beforehand.
Lack of consumer trust
The panel was then asked whether the hike in prices will create a lack of trust among consumers.
E.ON’s representative Sara Vaughn said: “This is something that we have been tackling in our advertising. Some of you may have seen it: it heads up with ‘Why on earth would an energy company want me to use less energy?’
“We are trying to be very honest with consumers, and we are trying to explain to them exactly why prices are going to go up and the underlying reasons behind that. We are doing that through advertising; through talking to consumers in town hall meetings; and through our website. We’re perfectly aware that there is this lack of trust around energy companies.”
Lack of competition
The debate about price also fell on to the subject of competition, with the Energy Select Committee echoing Ofgem’s suggestion that the energy market is too heavily dominated by too few players, which has an upward effect on prices for consumers.
But the big six disagreed with this saying that the market in the UK was “significantly” more competitive than most of Europe, where far fewer suppliers dominated.
Are rising wholesale costs to blame?
Overall, aside from the costs involved in bringing about renewable energy targets, the suppliers blamed increased wholesale costs for the recent wave of price rises.
But if the overall Ofgem investigation finds evidence of uncompetitive behaviour then the main suppliers could be forced to disclose information about their wholesale costs, which at the moment are unknown, and Ofgem has no power to demand access to.
If the UK adopts new EU legislation, the regulator could demand this sort of information. This would mean far more transparency for the consumer about how their gas and electricity supply is priced and would show the margins the suppliers set.
The Energy Select Committee will produce a White Paper by this Spring outlining the progress in Electricty Market Reform. The Ofgem investigation continues until next month.
