School Day

Ofgem must be more energetic

0 Comments | Herald, The; Glasgow (UK), Jul 29, 2010

IT was only to be expected that the coldest winter for 30 years would be a profitable one for gas and electricity companies. Not content with almost doubling profits in the first half of the year, however, British Gas (which trades as Scottish Gas north of the border) is warning of an impending rise in household fuel bills while announcing a pound(s)585m profit.

Consumers are entitled to feel they are being held to ransom by energy companies which put up retail prices to reflect their increased costs but are notably slow off the mark in passing on a reduction in wholesale prices to consumers.

Privatisation was supposed to inject competition into the market to drive down prices and result in better service for customers. Two decades on, a series of takeovers has reduced the number of energy suppliers from more than 20 in the late 1990s to just six main providers, recently joined by two new competitors, Ovo Energy and First Utility.

Accusations that “the big six”, four of which are owned by foreign corporations, are operating as a cartel were dismissed by the regulator Ofgem but there is a consistent pattern of a price rise or reduction being followed by all the others. British Gas has tended to lead the pack but its 10% price cut in February (a major factor in attracting 223,000 new customers over the last year) was in response to sustained pressure from consumer groups after wholesale prices had plummeted by 60% in the previous 18 months.

The relationship between the retail and wholesale prices of gas is so opaque that customers and pressure groups find it difficult to question claims by suppliers that the mismatch is due to price fluctuation between the time wholesale supplies were bought and retailed. OECD statistics showing UK gas and electricity bills have risen twice as fast as the EU average must fuel suspicion.

With 4,000 different tariffs on offer, only those with access to online comparison websites tend to switch suppliers to secure the best deal. The regulator, Ofgem, has been far too feeble in safeguarding the interests of consumers. Despite ruling that companies should not charge customers more than the cost of processing different payment methods, for example, pricing policies still penalise those who pay quarterly (often those on the lowest incomes) while the best deals are aimed at those who pay by monthly direct debit.

More transparent billing and simpler tariffs, along with the installation of “smart” meters which avoid the need for estimated readings and allow consumers to monitor their usage, are essential if competition is to be effective.

The home insulation scheme begun under the last government is one of the most effective ways to reduce the energy bills of people on the lowest incomes; it would be a mistake if it were sacrificed to meet budget reduction targets,

Ultimately, prices can only be stabilised by reducing dependence on volatile wholesale energy markets
wholesalers