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Wholesale energy prices down. Should our bills drop too?

After gas and electricity price hikes of 15-20% last autumn, we’re finally getting some respite, with smaller energy companies cutting their prices. So why can’t the bigger energy companies follow suit?

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?

Comments
Member

I switched to Ovo Energy over 2 years ago. I have found them to be an extremely efficient and helpful company, following a complete nightmare with one of the big companies which took months to sort out with not even a apology.

I wish the small companies success – from a very happy Ovo customer!

Member

Hot on the heels of this Convo is a 5% gas price cut from EDF. Richard Lloyd, Which? executive director says:

‘This gas price cut will be welcome news for millions of consumers with already squeezed household budgets. But it follows a hike of 15 per cent last November. Now the pressure is on for the rest of the major suppliers to follow suit.’

We shall lie in wait…

Member
Julia Rae says:
12 January 2012

I have just installed my solar panels, so I know I can supply 50% of my own electricity and only get ripped off on the other 50% : )

Member

And now British Gas and SSE have followed with price cuts of their own: http://www.which.co.uk/news/2012/01/british-gas-and-sse-announce-energy-price-cuts-276602/ But are they cutting enough considering they hiked their prices last year?

Member
Edward Armstrong says:
19 January 2012

Wholesale natural gas is now around 50% cheaper than 6 months ago, the energy companies increased the price of gas and ELECTRICITY because gas fired power stations produce a large proportion of electricity.
Now we have companies offering 5% off gas and nothing off electricity, another company offers 5% off electricity and nothing off gas. Thus dual fuel deals are devalued.
The 5% off gas or electricity realy equates to a 2.5% drop overall, so yes we are still being ripped off
Sounds to me as if we have a cartel in operation, I thought cartels were illegal as they rig prices.
An overall 2.5% decrease in prices against the huge rises of last year is a slap in the face for consumers, The energy minister Chris Huhne, (I think he is the one under police investigation regarding who was driving a speeding car) Seems to think this is a good deal, (he defended the price increases) last year.
Is there anyone out there who will take on the energy companies, lets cut them down to size.