Wholesale energy prices down. Should our bills drop too?

Last Friday, Ovo announced a 5% price cut to its ‘New Energy’ tariff and became the second small supplier to cut its prices, following a move by Co-operative Energy in December last year.

The media has been quick to speculate about whether the bigger energy companies will follow in their footsteps. The Times has even claimed that British Gas is considering a ‘modest cut’ of less than 10% in the next month or so.

Meanwhile, the campaign group 38 degrees has launched a petition calling on the six large energy suppliers to cut their prices now – citing the fact that the wholesale prices for gas and electricity have fallen in recent months. These savings, 38 degrees says, should be passed on to their customers.

As Consumer Focus has said; ‘the further the wholesale price falls, the greater will be the clamour for others to follow OVO’s lead’. And at the very least, a challenge should be set to all energy companies, big and small, to explain to us why they can’t lower their prices now.

Why not lower your energy prices?

The main argument energy companies cite for not immediately lowering their prices tends to be due to their ‘hedging’ strategies. This basically means that they buy their energy months in advance. This ensures that their customers are buffered from extreme price rises and cuts due to the volatile nature of the gas and oil markets.

And certainly most of the evidence suggests that we prefer stabilised energy prices of this kind, as it lets us budget month by month and shields us from big bill shocks.

It appears that the Fukushima accident in Japan and the conflict in Libya both helped to push up the cost of gas to UK consumers. So, those companies that stocked up earlier this year could also argue that these events mean they’re unable to drop their prices now.

However, the only problem with this argument is that we don’t know enough about each of their different hedging strategies. And this leads to scepticism about whether pricing really is due to these purchasing decisions – or is actually a case of ‘follow the leader’.

Time to switch to a smaller supplier?

Thankfully, Ofgem has asked the accountancy firm, BDO, to conduct an investigation into hedging practices, trading profits and wholesale prices paid by energy companies. This will hopefully give us more information about how the rise and fall in wholesale energy prices affect our bills, so we look forward to seeing the results soon.

Nevertheless, as in any competitive market, you might expect the big energy companies to start feeling pressure to compete on price so that they can retain and attract new customers.

So, if none of them feels under such pressure, perhaps more of us need to give the smaller suppliers a chance by switching our gas and electricity to their cheaper deals?