Angered by the British Gas and Npower price rises?

We’re faced with an all too familiar sinking feeling of another winter of rising energy bills. The British Gas bosses have been in the TV studios and on the airwaves defending the reasons for the increase. It’s not our fault, they say. The wholesale price we’re paying for gas is up 13%, they plead.

The cost of getting energy to people’s homes has added £25 on to bills and will add a further £15 next year, they argue. And they claim that the cost of delivering government policies – things like the energy efficiency schemes – has also increased by £25 per household this year and will add £40 to bills in 2013.

SSE has justified its price rise with similar arguments. And it’s probably only a matter of time before we see Scottish Power and EDF follow suit. The last of the dominant energy providers, Eon has promised a price freeze until January.

But do these claims stack up? The answer sadly is, we just don’t know…

Wholesale energy up – retail price rockets

You may have heard of the so-called ‘rockets and feathers’ analogy – that’s when wholesale prices of energy go up, retail prices rocket up with them. But when wholesale prices fall, retail prices seem to fall like feathers (ie much slower and not as low). You may also have seen charts that show the difference between the wholesale price of gas or electricity and the price that we pay. And these generally make people ask questions about why there seems to be such a gap.

On the face of it, these charts make it appear like we’re being ripped off. But we have to remember that these are in fact indicative and based on a lot of different assumptions.

The problem is it’s impossible to tell what is going on. We have to take it on good faith that the energy industry is working for consumers. And given the recent issues with the banking sector, it’s no surprise we question the information these companies provide us with.

We simply cannot unpick the price rises, there is in fact no single wholesale market for energy. And there is no real benchmark for wholesale prices unlike, say, in the petrol market. And because energy is bought and sold within the six large vertically integrated companies – who make the energy and then sell it on to us – lots of trading happens behind closed doors, making the whole issues even murkier.

Getting something for nothing

Now let’s turn to the issue of the increasing cost of delivering government policies. Running schemes to achieve carbon savings by helping us make our homes more energy efficient do cost us money. Of course, all these offers of free or heavily subsidised loft and cavity wall insulation are not really ‘free’. And when you consider that British Gas has been paying consumers £50 per sales lead, it’s no wonder costs have gone up.

But yet again, what we don’t know is the precise cost of each government programme to suppliers – or how they’re passing these costs on to their customers.

These kinds of questions raise ongoing concerns about just how competitive this market really is. We, as consumers, need to benefit as much as the shareholders do. We need reforms to ensure that there is more transparency in the energy market. Without it, consumers just don’t know whether they are getting a fair deal.