Success! Ofgem refers energy market for full investigation

Just over 2 weeks ago, Ofgem wrote to the Big Six energy suppliers to explain to their customers what impact falling wholesale prices will have on bills.

Is it too early to point out I’ve heard nothing from my supplier and I guess many others haven’t either. Which for me is sadly no surprise.

Will ofgem be following up on that letter or is referring them to the CMA just them passing the buck?

malcolm r says:

This inquiry was proposed in March, but my concern is that it will take 18 months to report, and no doubt another 6-12 months before any proposed changes might happen. With all the existing background, why cannot the CMA get stuck in with a lot more urgency (I don’t suppose the General Election in 12 months is a factor?)
I would like to see transparency in the pricing that the energy companies charge. I want the following items to be shown priced separately on my bill:
– the actual raw energy cost – kWh prices – of gas and electricity shown,
– the distribution charge shown (through wires and pipelines, a charge proportional to usage),
– the policy and regulation costs imposed by the government (fixed costs, not dependent on energy consumption) such as support for low carbon technologies, support for vulnerable customers, improving customer energy efficiency; and consumption-dependent costs such as the carbon tax
– supplier costs – (fixed costs, not dependent on consumption) such as admin, meter reading, smart meter roll-out.
Tariffs should be shown as an energy unit cost – including all elements that are consumption-dependent – and a separate cost for items that are not dependent on your energy consumption. Behind these costs should be, for those interested in understanding their costs, the above breakdown.
Energy costs are not simple, and will become even less so when we get time-dependent unit costs, a feature that smart meters make possible. Making clear how charges are arrived at should allow better control and informed criticism of the suppliers.

wavechange says:

For me the top priority is to have simple unit pricing so that anyone capable of comparing the price of petrol or the price of groceries can see which energy company is offering the best deal. For this to work, we obviously need to get rid of standing charges. We don’t pay standing charges on petrol or on our groceries. The other reason to get rid of standing charges is to prevent low users subsidising those who use more.

Though the ‘big six’ have been responsible for much of the public distrust of energy companies, we obviously need to look at what the smaller companies are doing as well.

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malcolm r says:

wavechange, I want to pay for the energy I use at the same rate as anyone else on my tariff. So if I use twice as much gas and electricity in kWh as someone else, it is fair to pay twice as much for it. But in energy supply are some costs that do not depend upon your consumption – it costs no more to administer my account, supply and read my meter, as someone using half my consumption. So I do not expect to pay twice as much for it. I expect to pay the same as anyone else for the smart meter roll out, to support vulnerable users, and for supporting low carbon technologies.
So there is a cost based on consumption, and a fixed cost element. It is fair that the total price I pay should reflect the real costs involved. Subsidy has nothing to do with it. Many who use more energy do so not from choice but necessity – the elderly, the sick, large families, those at home all day, those in poorly insulated houses and so on. Many are likely to be in fuel poverty. They should not be penalised by being overcharged for the fixed-cost element, which is what would happen if you have a unit price only tariff.
The “simple tariff” argument, based on the assumption that the majority of us cannot do simple arithmetic, falls apart anyway when you do not have “simple” tariffs – if you have an economy 7 type tariff, if you need to compare dual fuels from different suppliers, and when smart meters introduce several time-of-day tariffs – you will have to compare not one unit cost with another, but several.

wavechange says:

Malcolm – We don’t pay a standing charge on petrol, as Which? reminded us when it first put the argument for simple unit pricing. If we priced goods in the way you want, we would be paying a separate distribution cost for a jar of coffee. Rather than unnecessarily complicating matters, it is best to include the fixed costs in the price. We can help those in fuel poverty etc. where there is a need, but this does not mean that prices have to be complicated for the rest of us. The other alternative, as has been discussed before, is to pay for the fixed costs through general taxation.

One cost we can do without is smart meters, simply because of the ridiculous cost of the roll-out. If anyone wants one they should pay for it.

malcolm r says:

wavechange, “Rather than unnecessarily complicating matters”. First, it is not complicated. Second, charging people unfairly – making them contribute more towards “fixed” costs that do not depend upon how much energy you consume – is wrong. Such unfairness would probably form the subject of another Which? conversation. It is penalising many vulnerable people – I don’t think that is right.
The “dumbing down” argument – making it simple even if it is unfair and illogical – does not wash with me.
The petrol analogy is ill-founded. If you want to buy the cheapest fuel you are likely to have to drive a few miles to get it. This will cost you in fuel and wear and tear. To save 2p a litre – say £1 on a fill – you are likely to spend more than that in fuel in just getting to the cheaper station. Who calculates that extra cost and factors it in? You don’t just buy a jar of coffee, you fill a basket or trolley when you shop. Do you price-compare every single item to make sure you have the cheapest total shop? Of course not. So neither of these examples are simple in reality in getting the cheapest deal..
Energy consist of both consumption-dependent and fixed costs. It is fair we should pay that way. If there are people who can’t work out their best deal – as opposed to can’t be bothered – then concentrate on giving them help, not in distorting a system on the dubious basis that the UK is populated by people who lack numeracy.

wavechange says:

Malcolm – It was Which? that made the analogy with the price of petrol and I very much support what Which? has set out to achieve.

When we are in our dotage we might not be able to compare energy prices, which can vary a lot more than jars of coffee and litres of petrol.

Please let us consider those less fortunate than ourselves.

malcolm r says:

wavechange, Which? is not always right and has not been particularly explicit in promoting this. Second, “considering those less fortunate than ourselves” is exactly what this is about; ensuring for all of us, including those struggling with their money, that you only pay for what you should. Vulnerable higher energy users should not pay more for their meter reading, bill administration, smart meter roll out, technology support than others more fortunate.

wavechange says:

I am going to continue to support Which? on this issue, Malcolm.

Complicated energy prices are there to support shareholders and those in the industry. We can and should support the vulnerable. Your approach has low users supporting high users, irrespective of whether they are vulnerable or just profligate.

malcolm r says:

wavechange, I am not trying to change your mind on this – we have different points of view and that is what conversations are about. I am, however, concerned that this sort of conversation should explore issues properly, and not just focus on, for example, an emotive argument.
I have put forward the argument that there are fixed costs, and consumption-related costs. It is up to others to decide whether it is fair that we should all pay our correct share towards them.
“Vulnerable people” are present at the low, medium and high user ends so will not be automatic losers or winners. The “simple” tariff might make it easier for some to choose, but if their bill goes up because of it, where is the gain there!
For example, if you incorporate all the fixed costs as part of the unit charges – to give the “simple” tariff proposed by some – a low energy user is likely to save £85 a year, a high user will spend another £109 a year. A low user might be a couple both earning, out all day, modern well insulated house. A high user might be an elderly couple on a pension, in all day, needing more warmth, more cooking and washing, maybe in an older poorly insulated house. Why should this vulnerable couple on a low income have to pay an extra £109 just to keep tariffs “simple”.
Make sure that when we do consider those less fortunate, we do it in a way that doesn’t cost them money.

Dave, Newcastle. says:

As I have said before in a related conversation, it is not right that you need access to a computer to sort out the cheapest energy deal. Therefore pricing per kwh is the way forwards. Get rid of the current complex pricing system that is only in the interests of the energy companies.

Donald says:

Malcolm, your argument based on the “poor old couple” does not stack up. These are exactly the people who are unfairly paying over the odds for their fuel. Those who are forced to economise on their fuel consumption in order to make ends meet are severely disadvantaged by standing charges. The high earning couple with 3 kids and a big house are quite happy paying the same standing charge as the low income consumer and then using loads of fuel at a relatively low unit rate, subsidised by the standing charge applied equally to all consumers.
The real reason why the energy suppliers need the standing charge is that without standing charges, it would become immediately clear which supplier was offering the cheapest deal: just like the big signs outside the filling stations….

malcolm r says:

Donald, both comments revolve around the same point – energy need is not income-dependent. To keep warm, many needy people must spend a much larger proportion of their income on energy than others. Higher users might be well off or they might be poor.
An unfair charging system that does not take proper account of actual costs is indiscriminate in its effect. Distorting the charge purely to satisfy a “simplistic” lobby will not help those who deserve help. Nor will a “simple” charge work in practise to make comparisons any easier.
There are fixed costs in your energy bill, some regulatory and others administration. I suggest that first, the “policy and regulatory” ones, including smart meters, should be removed and paid for out of taxation. On a medium user’s bill these will be around £100. Second, the admin charge should be approved by the regulator. One way then to help the needy might be to pay the remaining fixed cost element – the admin charge – to this group, together with a Winter Fuel Payment. I would only give this payment to those in need – not to everyone over 62 as now.

Donald says:

Malcolm, by your logic (as wavechange already said), filling stations and supermarkets should also apply standing charges. You can add to that list, restaurants, airlines, buses, trains – the list is endless. All these businesses have fixed costs which are not directly related to the volume of business transacted by any single customer.
Any business knows the level of its fixed costs and it has to recover these by spreading the fixed costs across its known total sales volume. There is absolutely no reason why the energy suppliers could not do likewise.
Regards, D

malcolm r says:

Because the businesses that you mention cannot apply charges in the same way as others – energy, telephone, water as examples – does not make them right and the others wrong. There is no logic in that. A major difference is that you contract to buy all of your energy from one chosen supplier. That allows in principle the real costs to be paid. The examples you mention do not get your exclusive custom – you are free to buy food, petrol and whatever from any outlet you want at any time. It does not alter the fact that each energy customer costs the supplier the same as any other for certain items, still with the majority of the bill depending upon consumption. Charging on that basis is a fair way that your examples cannot do.
I don’t agree with cross-subsidy. That is what “simple” unit prices would do, quite indiscriminately -the poor and needy would not be targetted simply because they are not all low energy users; a lot of better-off would benefit as well. Not the way to solve a problem, I would have thought.

malcolm r says:

1 July 2014

Dave, Newcastle, “it is not right that you need access to a computer to sort out the cheapest energy deal”. As far as I can see the switching services all offer a phone facility as well as internet.

william says:

Yesterday on Sky News they interviewed the boss of Centrica ( you can find it if you google “sky news king centrica” ) You should watch the video rather than take my biased view on it below.

One of the questions he was asked was about ofgem writing to energy companies about the wholesale price ( at the 1:56 mark). While he blatantly didn’t answer the question what he did say, apart from being a load of cow droppings, was very clearly what the problem is. To para phrase its basically consumer fault for not only wanting cheap prices but predictability in those prices. And to great service to the country they forward buy. And that switching isn’t quick enough.

Well being able to switch quicker from one rip-off supplier to another won’t help. And is it our fault they can never forward buy to the consumers advantage. Maybe there should be a cap on the retail prices charged at something like wholesale price + x% and if their buyers get it wrong they end up footing the bill and not us.

Dick Down says:

Whilst cost & service are critical consumer factors, I think the bigger issue looming is security of supply. Will the lights go out?? The old CEGB used to operate on a maxim of 20% installed spare capacity at peak times to cope with the inevitable station outages. Long gone are those days. What obligations can be placed on the generators to ensure they build new plant to replace those plants due for closure and give us the standby capacity and fuel storage we need?
The drive for green energy needs an honest debate. Offshore wind is an area needing more reporting. Forget costs for the moment, what is the life cycle energy balance? (i.e the energy taken to build, inc distribution and equivalent standby non wind power stations to cope with times of no wind, and ongoing maintenance compared to the energy produced in their lifetime at around, I believe, 30% utilisation.)

John R says:

It is important that any investigation looks at holding company profits. For example if Centrica deliberately overcharges British Gas, British Gas looks as if it is making reasonable charges to customers but the excess profit still goes to the holding company.

jfc norfolk says:

TO INVESTIGATE. THE INTER DEALING AND PRICING BETWEEN BIG SIX’S PERCHASING DEPARTMENTS ( FROM FUEL PRODUCERS ) TO THEIR OWN RETAIL CUSTOMERS, IE TO ESTABLISH THE PRICE PAID TO PRODUCERS AND THE PROFIT WHICH COULD BE HIDDEN OR MANIPULATED BY THE TIME IT GETS TO MARKET EG US !!!

malcolm r says: