/ Home & Energy

Lack of competition in the energy market costs us billions

Fair energy illustration

Our latest analysis of energy prices suggests bills could have been slashed further and sooner than the recent round of cuts. Do you think you’re paying a fair price for energy?

The Big Six have each announced price cuts to standard gas tariffs of up to 5.1%. We weren’t convinced these cuts went as far as they should, so we analysed movements in energy prices. You may not be surprised to hear that we found the price you’ve been paying hasn’t been in line with falling wholesale costs. But by how much?

Energy price cuts don’t go far enough

Using real market data, we analysed the cost to suppliers of buying wholesale energy since 2013 and compared this against what you’ve paid in the same period. We found that the failure of retail prices to align with wholesale costs has cost consumers £2.9bn over the last year – that’s £145 per household on standard energy tariffs.

Despite the recent cuts to gas prices, we think they could have been slashed by around 8.8-10.3%. And electricity prices should have seen a reduction too, by up to 10%.

We also see no justification for the price hikes in late 2013 – if they hadn’t gone up customers could have saved £421m on gas prices alone.

Energy price rises

Energy market investigation

All of this places a massive question mark over how suppliers have been setting prices over the last two years. We have submitted our analysis as fresh evidence to the ongoing Competition and Markets Authority investigation into the energy market, and to HM Treasury for its more recently announced inquiry into oil prices.

As part of our Fair Energy Prices campaign we want the CMA enquiry to establish once and for all whether the price we pay is fair and set out radical reforms to ensure the energy market works for consumers.

So what are your thoughts on this? Do you think we’re paying a fair price for energy? Does the CMA need to examine this as part of its energy market investigation? Over to you…

Comments
Member

It is very difficult for consumers to know if they are paying fair prices for anything. Sometimes we can see evidence of a problem, such as when a supermarket has a special offer after substantially increasing the price or a large pack is poor value compared with a small one. Usually we are guided by what others say.

Kate has provided a link to the petition about fair energy prices, where we are asked to sign up to reach the target of 100,000, but the number that have is already well above this target. There’s also the petition to ‘fix the big six’. Two campaigns related to energy. We can see for ourselves that as with petrol prices, suppliers are quicker to raise prices than they are to drop prices in response to fluctuations in the price they pay.

The way in which energy is sold provides me with the biggest clue that something is very wrong. In recent years we have been offered a bewildering range of tariffs, sometimes with incentives to further confuse matters. My previous supplier offered Tesco Clubcard Points. Then there are fixed price tariffs, where the we save money if the price goes up. We are being invited to gamble over the price of energy.

It is utterly ridiculous that we are expected to put information into websites to work out whether or not to stay with our existing supplier of gas and electricity or move to another one. Or maybe get gas from one supplier and electricity from another, to save money. Or sign up for a collective switching scheme, like I did last year. Many do switch supplier regularly. I have switched prices only twice since privatisation, though I have compared prices more frequently. The first change was easy and the second a bit of a nightmare. I would like to know how much switching is costing the consumer. No doubt part of these costs are met by those who have not switched. I would like to know why many people stay with the same supplier for years or have never switched since privatisation introduced competition and crazy complexity.

There is snow on the ground this morning and the boiler has been working overtime. I can cope with my energy bills for the time being. What concerns me is how energy prices are affecting those who are really struggling to make ends meet. Are they logging on to price comparison websites? Maybe not if they don’t have a computer. If energy suppliers published simple unit prices for energy, anyone capable of deciding which brand of cornflakes was best value for money would be able to choose between suppliers.

It really is time to start thinking about how we help those who are – for whatever reason – paying over the odds for their energy. We all need energy and I believe that the government should control energy prices. Many have suggested that energy is re-nationalised. I can understand that point of view, but perhaps a better way forward is to take advantage of companies working in competition with government control of pricing.

Member

There are a few problems with having utilities under national ownership:

1) there is less focus on cost – several studies in Australia shows that the costs of energy networks in states that kept public ownership (NSW and QLD) are significantly higher cost – whether looking at running costs or when investing in assets. National Grid in the UK will invest £20bn pounds during its currently regulatory period. Not only is that likely to be done on time and under budget, the cost savings will also be shared with consumers under Ofgem’s new regulatory regime. Can anyone think of a government £20bn investment scheme that has delivered similar results?

2) Competition does give a focus on customer service. The big six have scored poorly but there is a reasonable amount of differentiation amongst them. E.On in particular stands out of late in making big improvements (USwitch survey’s show this more clearly). New entrants all have the best customer service – is that a surprise? You can’t win customers if you treat them badly.

2) Competition does bring innovation. Whether it is Hive or Nest, or a whizzy app (see reviews of British Gas’s app here: https://itunes.apple.com/gb/app/british-gas/id340473961?mt=8). The high street banks are not a fantastic example of innovation or customer service – but compare the experience of walking into a bank branch these days with a big post office.

On government controlled prices, are you confident prices will be set to reflect costs? History suggests, prices can be used to buy votes or to raise taxation through indirect means (fuel duty anyone)? Few have heard of the current government’s carbon price floor which imposes a top up tax on all carbon dioxide emitted by the power sector (it gets passed through to bills like all costs). Last year it raised over £1bn for the Treasury.

Lastly, I agree we should all pay a fair price for our energy and the vulnerable need to be protected. However, keeping the price of things artificially low so that it is affordable for the vulnerable is very expensive way of going about things, as paying for subsidies for the non-vulnerable quickly gets into large numbers. For the same pot of money, a targeted scheme (whether direct payments or free energy efficiency solutions) would give a much bigger benefit to those who need it most.

Member

I am not supporting re-nationalisation of energy supply, RTA. I very much agree about the need for innovation. Unfortunately, privatisation has gradually brought some problems, so pricing is complex and it is difficult to know if we are getting good value for money. I am also not happy about the extent to which our energy supply is in now under control of other companies and the extent of investment on wind power, when it is obvious that we need a more diverse approach to renewable energy.

I am not suggesting subsidies other than protecting the poor from being hit to a greater extent than heavy users by standing charges.

As you say, there are risks with government having influence on energy prices but not many people seem to have much confidence in the present situation. What I am seeking is simply a way to stop companies making excessive profits. They are not charitable organisations, nor should they be.

Member

I think we can all agree that trust is the big issue and regaining it would solve most of the problems.

I would point out that the present climate appears to assume all the big 6 are all guilty. I find it amusing that it is the big 6, not the big 5 – poor EdF has not made a profit from energy supply since public data started being disclosed in 2009. If it is good to be suspicious of the big six, surely it is good to be suspicious of those accusing them too, even Which?. There is plenty of good that campaigning has done (improving customer service, more public awareness, etc.), but Which?’s energy campaign appears to me to by far its most successful in grabbing headlines. Given the boost to its profile, is there a danger it continues to cry wolf when the moment has passed and it is time to move onto other more worthy but perhaps less media friendly issues?

The good news is that CMA should report mid year on excessive profits and competition and all. I hope that starts the process of rebuilding trust.

On complexity, there is tendency to blame tariff proliferation for a lack of trust. However, all consumer services show that the large majority knows how to switch and when they do so they are confident in their choices. Research in the railway area shows that customers dislike tariff complexity, but when asked if they would prefer a move to flat pricing with no chance of saving money (booking ahead, travelling at really low demand times), they firmly reject any simplification. I’ve seen enough variety of opinion on Which?’s discussion boards to see that some hate standing charges while others don’t mind them. Others love paper bills, or apps, or credit interest on their balances. One size rarely fits all. Tariff simplification means giving up choice.

Member

RTA – The comparison with railways is useful and something we can all relate to. As you say, different consumers find it difficult to cope with a diversity of tariffs yet may complain if what they want is not available. I am fed-up not being able to pay for what energy I have used by direct debit. That’s simply because I have had years of building up excessive credit balances and having my direct debits increased when there is demonstrably no need. That would not suit those who prefer to budget for a fixed monthly payment.

Some time ago I found out that many people rarely switch supplier and some have never done so. I know some of them and the reasons are varied. In some cases they are old and decrepit or have health problems. Fortunately everyone I know in this situation is, to the best of my knowledge, quite well off and living in their own home rather than in rented accommodation. Not everyone is so fortunate.

I was quite surprised how much my current insurer charged for arranging my new home insurance. I wonder how much switching energy suppliers costs – max, min and median. My last switch was a nightmare, exchanging emails and phone calls. I’m sure it’s not typical but it can happen. Changing tariff with a supplier – as mentioned by Malcolm – should not be expensive.

The energy companies will have to do a lot to regain my trust. I see a need for more public consultation involving the many who don’t have much of a clue about energy supply. Maybe if supermarkets sold energy it might help people to engage with looking for better prices. They have certainly made an impact in other areas previously dominated by specialist companies.

Member

“Maybe if supermarkets sold energy”. Co-operative, Sainsbury, M&S currently, but just agents for others. All the small “competitive” companies seem even pricier in my area than the big ones. I’d like to see a genuine co-operative (as opposed to the Co-Op) energy company with customers as shareholders able to share profits.

Member

Thanks Malcolm. I did know about M&S but not about the others. I should have said I was thinking more about services available in supermarkets rather than online. There are still many who are more comfortable with face-to-face contact or do not use computers, at least for financial transactions.

Perhaps supermarkets could market energy in the same way that insurance brokers select the most appropriate cover, at least for the companies on their books. Customers might have to bring along their recent bills but as you have pointed out, it’s not too difficult for someone to do a price comparison online. An after-sales service would be needed in case of problems and it’s unlikely that a supermarket would provide personal service free of charge.