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The truth behind spiralling energy prices

Gas in shape of pound sign

We’ve all seen the rather undignified blame game around why our energy prices are rising. Some people blame the cost of wholesale energy. Some people blame the government’s green subsidies and policies…

Some blame the ‘greedy profiteering energy fat cats’.

Some have even blamed consumers for not helping themselves when it comes to cutting back on their energy use or finding the best energy deals that are out there.

The truth of course is that no one group is right. The real truth is our energy market is fundamentally failing.

No one single measure will resolve the problems that are hitting consumers hard. We need more radical reforms across the board. So what are the real issues that need to be resolved?

A competitive energy market

Switching is low despite three quarters of people being on some of the most expensive standard tariffs. We found that consumers are losing out to the tune of £3.9bn a year from not being on the best deal.

We all need to be able to simply and swiftly switch to better deals and force the energy companies to fight over our custom. Sadly the regulator Ofgem’s plans for reform – while a step in the right direction – will fall short of delivering this.

The public also has to have faith that the energy market is open and transparent.

At present the murky way that energy is bought and sold on the wholesale markets – often from one business to another within a single company, before it’s sold on to consumers – does not give people confidence. This has to be the next major reform to our energy system.

Keeping costs in check

Now let’s turn to costs. While it’s true that the cost of government policies is an increasing part of our bill – around 10% of our bills, and rising. The problem with these costs is the worrying lack of scrutiny about whether they’re being delivered at the lowest possible cost to you.

We need to invest in new generation. We need to make our homes more energy efficient. But not at any cost. So the government needs to keep these costs in check and systematically look at each programme to see if it could be delivered more efficiently and cost effectively.

For example the Energy Company Obligation (ECO), to support the fuel poor: we’d like to see more evidence that this is delivering what the government said it would and not just plugging any holes left by the low take-up of the Green Deal.

That’s why we want the National Audit Office to be able to take a look at the cost of all government policies on our bills.

We want quarterly reports as well as an annual audit that sends a clear message to ministers about where they can cut costs while still delivering these vital policies. That way ministers and suppliers can be held to account if it’s found they’re not providing true value for money for tax payers.

Making markets work for you

These are big changes that need to be addressed by all parties ahead of the next election. But there is no reason why we should have to wait.

We want to see less focus on point-scoring politics and more on politicians from all parties coming together to make this market more competitive, so that it works to the benefit of hard-pressed consumers.

Instead of the finger-pointing blame game, we now need clear-headed proposals that really address the root cause of these rising costs of energy and deliver more affordable energy for all of us.

[UPDATE 17/10/2013] – British Gas has announced a 9.2% price rise, following SSE’s price hike announcement earlier this month. In recent years we’ve seen a domino effect on energy price rises, so we’re expecting other energy suppliers to follow suit.

Help us take action on energy by signing our energy prices campaign. And if you’re frustrated with British Gas’ latest price rise, show them what you think by sharing our picture on Twitter.

Comments
Guest
glynteg says:
14 October 2013

I would like to question some of your data used in the article in October’s issue. Your figures do not agree with Ofgem and DECC figures. – see paragraph below taken from the Report of the Energy & Climate Change Committee, “Energy Prices, Profits and Poverty”, page 59.

‘125. According to Ofgem, environmental charges currently account for around 11% (£59)
of average annual electricity bills and 6% (£49) of average annual gas bills.266 DECC
analysis suggests that energy and climate change policies make up approximately 9%
(around £112) of the average annual dual fuel bill.267 However this is set to rise sharply in
future years, with costs falling largely on the wholesale electricity price. DECC estimates
that its policies will add to 33% to the average electricity price paid by UK households in
2020 and 41% in 2030.’

In your report you say ‘about £53 of the average annual energy bill goes towards policies to promote investment in low-carbon energy. This makes up about 4% of an average household energy bill in 2013’. I do note that this does not tie up either with your article above which says 10%. However, according to Ofgem, this figure is around 11% (£59) for electricity bills and 6% (49) for gas bills. DECC analysis say 9% (around £112) of total energy bills. So where did you get your figures from? You should quote sources when giving information like this. It is poor research and questionable without that information. You say ‘The public also has to have faith that the energy market is open and transparent.’. Well, I expect Which also to be open and transparent and neither the article in the Octobet issue or your article above are transparent.
Also you say ‘It (the average household energy bill) is predicted to grow to £118 by 2020.’ That is roughly 9%.
The figures given by DECC say that the policies will add 33% to average electricity bills by 2020. Given that gas already is at 6% according to Ofgem, your figures seem wildly optimistic. Again, where did you get your figures from?

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Guest

Hello glynteg, thanks for your comment. Our figures are based on the most up-to-date DECC data from March this year. They relate specifically to the cost of policies to promote low carbon energy – which isn’t the same as ‘climate change and energy policies’. Of course, all of these figures are estimates. Here is the link to our decarbonisation report which shows a clear break down of this as well as the references (please see pages 19 to 20): http://www.staticwhich.co.uk/documents/pdf/the-imbalance-of-power-the-challenge-of-decarbonisation-3-330830.pdf Thanks

Guest
glynteg says:
17 October 2013

Thanks for the reply and clarifying where your figures come from. However, it still seems to me that it is a huge problem for the ordinary persno to get real true facts. Your article above is entitled ‘the truth…’ and the article in the magazine is entitled ‘the truth…’ but both articles are only partial ‘truths’. They give different figures based on different government policies. So where is the ‘real’ truth? We need all the figures and all the policies taken into account. I agree the energy market is complex and ‘the big 6’ are very powerful but Government policies are having a very dramatic effect on prices so we need to know exactly how the policies affect prices. Also electricity is taking a far higher burden of increses than gas so it would be good to separate that out. There are still many households who do not have a gas supply and they are affected much more.

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Guest

http://shrinkthatfootprint.com/average-electricity-prices-kwh

Global prices of electricity together with purchasing power of the country in one handy web columnists page.

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Guest

Please keep up the pressure on this question. Both industry and government are hiding the truth.

1. Why are costs so high now? Which? magazine, October 2013, page 29 says “..the generation arms of these companies [i.e. the big six] made average profits of about 20% in 2012”. This would seem a significant reason for current high costs. But you don’t quote this figure in your article above. I would expect you to make a big point about this, and to challenge the big six on it. Surely profits of 20% are excessive and contributing significantly to our bills?

2. How much further will costs rise due to government policies? Your analysis above has already been challenged by glynteg, and you need to get it right. But I support your conclusions above in “keeping costs in check”.

Keep up the good work!

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Guest

Thanks for the support Willowe! We’ll keep campaigning on your behalf 🙂

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Guest

It’s odd how the energy companies will all say they buy many months in advance yet not one of their buying teams has ever seemingly managed to buy when the price drops. So why do they not get better buyers? Oh wait, they don’t care.

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Guest

So what do you think about British Gas’ latest price rise? A rise of 9.2% on the average household’s energy bills.

FYI a tweet you might like to share: https://twitter.com/WhichCampaigns/status/390800604194287617

Guest
glynteg says:
17 October 2013

Again, this illustrates my point about getting facts correct. British Gas is increasing prices for dual-fuel by 9.2%. This made up of a 8.4% rise in gas prices and a 10.4% increase in electricity prices. So electricity is bearing a bigger share. My electricity tariff is going to go up by 19.8%.
It is also DECC’s view (see the quote from DECC in my first comment) that electricity will bear the brunt of the rises due to Government policies.

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Guest

You can read more about British Gas’ price rise here: http://www.which.co.uk/campaigns/energy-prices/british-gas-price-rise-energy-bills-sse-17102013/

We’ve also created a graphic showing how people feel about BG’s latest hike: https://twitter.com/WhichCampaigns/statuses/390853267661393920

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Guest

One reason for spiralling energy prices that seems to have been overlooked is someone has to pay for all the CashBack that people switching are claiming. And I bet not one of the Big 6 mention that.

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Guest

Someone has to pay for the advertising by the energy companies too.

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Guest

And if they gave existing “loyal” customers a better deal, then they could save on advertising and people wouldn’t be needing to switch every couple of months too. (Says the guy whose been with the same provider for years, but with different tariffs)

Guest
David says:
18 October 2013

I’m not sure where Which? got the idea that ‘We want simple energy prices’.

What we want is choice, not being forced to choose from a small number of ‘simple’ tariffs.

The result of ‘simple energy prices’ is that my tariff, Staywarm, is being withdrawn by E.on as they will now be ‘only allowed a limited number of tariffs’.

So this misleading campaign is going to cost me more for my gas and electricity. Thanks a lot!

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Guest

I’m not surprised, and I think I warned of that tactic on previous convo’s. Like this one 🙁 …

https://conversation.which.co.uk/energy-home/energy-price-increases-gas-electricity-hikes-david-cameron-letter/

What Which and politicians seem to forget is that companies are in the business of making money and not providing a service, so they’ll do what’s in their best interests before anyone else, unless forced to act differently.

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Guest

Here’s our round-up of the reaction to British Gas’ price rise: https://conversation.which.co.uk/energy-home/british-gas-price-rise-askbg-reaction-twitter-facebook/

Would love your thoughts too.

Guest
b holland says:
20 October 2013

how much of the money that we pay to British gas goes to our tax’s man to help our economy as it not British own company any more
its a world away from British gas has we know it when own by us????
and how many time does a gas man tell you need some extra work that’s not cover buy the payment you pay. like power flushing parts no long available for you boiler and so on
big company that will get like supper markets that want it all .car ,house, loans,.i thing when banks was banks and supper markets was a food shop like Morrison it was so much better.

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Guest

Which? can help everyone on this topic by publishing in the national press, weekly if necessary, tables showing which tariff is cheapest in each supply area. I realise it’s a costly job but think of the kudos Which? would get from showing people – directly – where to go to keep their energy bills to a minimum.

I can see it’s not straightforward. We need a table for Gas and one for Electricity.
I don’t know how many Supply areas there are, but a table for each.
There may be one cheapest tariff for consumption up to 4000kwh Elec say; another above that.
Ditto for 20,000 kwh, say, for Gas.
And people need to know what they consume in a year in order to find the cheapest tariff.

But think of the prize and the benefits for everyone. It might even make the energy market work a bit better, for suppliers as well as customers.

Can it be done, Which??

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Guest

EDF seem to have 14 different areas for leccy and 1 for gas.

I’m guessing that its a hangover over from when there were ( pre privatisation ) probably 14 or so regional leccy companies and one Gas company

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Guest

Thanks william. I think you’re right, and found this map too :
http://www.energylinx.co.uk/electricity_distribution_map.htm
willowe

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Guest

From this weeks Spectator

” International domestic electricity prices. Pence per kilowatt hour

US 7.5
France 11.03
UK 13.93
Japan 17.46
Italy 18.20
Germany 21.38″
DECC figures

Of course the US are individually the largest polluters on the planet so we can feel faintly virtuous on our “green-ness”. Poor Germans pay very much more than we do so you have to wonder how useless they must be in managing an economy. Is it possible that the UK is not actually being shafted by the electricity generators?!!

As for the French they were in 2008 the largest net exporter of electricity in the world. However it is a complicated business with European countries selling and buying power from each other – this article shows where the UK and others figure.
http://www.renewablesinternational.net/france-net-power-exporter-except-to-germany/150/537/59937/

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Guest

“As late as 2003 the UK was still a net exporter of natural gas. Just 10 years later we import more than 50% of the gas we use. Over 20% is piped from Norway, 10% piped from the Netherlands and a further 20% arrives as liquefied natural gas (LNG) from Qatar. Our growing exposure to tightening LNG markets in recent years has been a key driver of rising natural gas prices.

To make a more considered comparison between prices in these 5 countries it is useful to convert prices using purchasing power parities (PPP). By using purchasing power conversions we account for the fluctuating price levels in each country relative to the US. The picture is largely the same, but the shape of the curves make a little more sense.

The similarity in price changes between the UK, France and Germany are plain to see. They are each competing for similar gas imports. When you consider that taxes make up 5% of UK prices, 16% of French prices and 24% of German prices, this chart makes a good deal of sense.”

http://feeds.feedburner.com/shrinkthatfootprint
See the graphs there. An excellent site. Basically the UK was living off cheap gas until we ran out – and did not invest in making housing energy frugal.