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The average energy bill is £1,420 – but are these prices fair?

Blurry numbers

When your energy bills go up, energy companies often insist that price rises are linked to the amount they pay for energy. But how can you find out if that’s true?

In a nutshell, you can’t. Although wholesale costs (the amount energy companies pay for energy) account for up to 60% of consumers’ energy bills, our report on wholesale markets concludes that it is impossible to verify that the price you pay is a fair reflection of this wholesale cost.

And we’re concerned that this is being unduly ignored in the current energy policy debate.

What’s the problem with wholesale energy prices?

The largest six energy suppliers in the UK are vertically integrated, which means their generation arms are able to sell to their supply sides internally. This happens behind closed doors, with little transparency or external scrutiny.

Between them, these six companies supply 98% of the domestic energy market and generate 70% of electricity. It has been estimated that very little electricity is actually sold on ‘open’ wholesale markets, which are – in essence – closed to non-participants (us included!) as a result of a murky trading and price-reporting system that is vulnerable to manipulation. Very much like the discredited ‘libor’ system in banking.

Across this whole set up, it is almost impossible for anyone looking in from the outside to obtain robust price information. This makes it hard for customers to have faith that the price they are paying is a fair one, which further undermines the already low levels of trust in this industry.

Based on what we can see, we think the very structure and governance of the largest companies, the low levels of trading and competition on the ‘open’ market and the closed nature of trading could be impacting on the competitiveness of the market – and therefore on the price you pay for energy.

Calling for an independent review

We want the government to recognise that the wholesale markets need urgent attention and we’re asking them to commit to an independent review.

Our central recommendation is that the supply side of these six energy businesses and their generation arms are ‘ring-fenced’ from each other – a trend that is consistent with the proposed ring-fencing of retail and investment banks. We think this would help to address a number of the problems we’ve highlighted, including boosting transparency and competitiveness.

We’re holding a joint event with think-tank IPPR tomorrow to ask energy businesses and politicians why this debate isn’t getting the same profile as other energy issues.

Do you think that the issues around wholesale energy prices are potentially as important as retail pricing and energy efficiency when it comes to your energy bills?

Profile photo of malcolm r

You could maybe look at other EU contries (for example) energy costs – presumably you are mainly focussed on electricity – to see how prices compare? There is a UK document published by DECC on the generation costs of electricity which looks at cost per MWh for different generation methods – you need an expert eye to interpret it. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65713/6883-electricity-generation-costs.pdf

Em says:
18 July 2013

I’m not sure I understand the need for transparency at every stage of the generation process to determine whether the price of electricity is “fair”. I don’t need to know how much the chef is paid to tell if a restaurant is overcharging me for food.

We all know, or can find out, the cost of raw energy. Today, Brent crude oil is trading at just over $108 per barrel or about £0.52 / litre. Kerosene 28 (domestic heating oil) sells for around £0.60-£0.65 / litre, which seems reasonable after refining and distribution costs are taken into account, plus the duty on heating oil. Road Diesel is similar in cost, if you deduct all the duties.

The energy value of kerosene is just over 10 kWh / litre. So the wholesale cost of electricity from an oil-fired plant should be about £0.05 per kWh before plant, distribution, transmission losses (typically 60%) and overheads. This is roughly what I pay for off-peak electricity.

And £0.15 per kWh doesn’t seem unreasonable to me for an energy source that is always available and 100% efficient at the point of use.

Energy in all its forms is a whole lot more expensive than it used to be and we need to get used to that idea. In fact, burning oil for heat is a criminal waste of a valuable raw material. Or am I missing something?

Profile photo of malcolm r

Em, I agree that it is not reasonable for energy companies to be forced to disclose all costs of their operation. Why then stop with them? We could ask all manufacturers to breakdown their costs. However, we can investigate them ourselves by comparing suppliers, costs in other countries, and deciding whether or not we are being ripped off.

An interesting comparison of European energy prices can be found at&filetimestamp=20130523135053
A quick look shows the UK in 2012 was 16th out of 27 for electricity price (91% of the average price) and 12th for gas (81% of the average price). So maybe we are not too badly off?

However, what is more striking is the increase between 2010 and 2012 – UK electricity increased by 23% (only Cyprus and Latvia having larger increases) and gas by 38% (Spain only higher at 68%). So on energy costs we seem to be paying below the European average. But our prices have increased more over the last couple of years than most other countries. We have to ask why? We should also be somewhat glad we don’t buy electricity in Denmark or Cyprus (66% more than we pay) or our gas in Sweden (120% more).

Gas no longer seems to be on the way out, with the USA planning exports to us in a couple of years, and our own fracking reserves. However, renewable energy is a more attractive prospect from a pollution viewpoint, but not necessarily from an environmental aspect – do you want inefficent wind farms behind your house, or solar farms on high-grade agricultural land? So what about tidal power – reliable and abundant, and better than nuclear? Where does that figure? Perhaps we should ask DECC.

Paul Hunt says:
18 July 2013

This is an excellent report and makes a compelling case for a full reference to the Competition Commission by the Secretary of State for Energy and Climate Change of Britain’s electricity and gas supply businesses. The problems in these markets, as you clearly highlight, are structural, yet, to date, the Government and Ofgem are relying on behavioural remedies which continuously prove to be ineffective. The Government’s Energy Bill proposes to layer further institional and procedural complexity on this underlying policy and regulatory dysfunction to secure climate change objectives. This will impose an additional, excessive and unnecessary cost burden on final consumers, taxpayers and the economy. And the proposed changes will be applied unilaterally in ways that conflict with and go beyond existing EU legislation.

I expect you realise that there is no possibility that the Government will consent to a reference to the Competition Commission. Previous calls for such a reference have been dismissed or ignored. It is necessary to expand the campaign to the EU level, because much of what is happening in Britain is a result of policy, regulatory and structural deficiencies in the efforts to complete the internal EU markets in electricity and gas.

In 2007 DG COMP conducted an energy sector inquiry which led to the Third Energy Package in 2009 – which has not yet been fully transposed in to national law in all Member States. The continuing Great Recession has overwhelmed the well-laid plans in the Third Energy Package and the accompanying 20:20:20 climate change objectives. They have also been overwhelmed by continuing Russian geo-political manoeuvring and the huge expansion of shale gas production in the US. The EU’s Big 7 – EdF, GdF/Suez, RWE, Eon, Vattenfall, Iberdrola and ENEL – continue to dominate the markets – even if they have been bruised by the abrupt phase out of nuclear in Germany, the increasing penetration of renewables and coal displacing gas in generation. The EU ETS is malfunctioning, despite the recent application of a sticking-plaster, and EU wholesale gas prices are much, much higher than they need be – even if DG COMP is finally investigating Gazprom’s gas contracting practices in eastern Europe.

There is a pressing requirement for a new DG COMP energy sector inquiry. Perhaps Which should align with consumer associations in other EU Member States to lobby the Commission, the Council and the Parliament to demand that DG COMP conduct such an inquiry. The Treaty for the Functioning of the EU has given the EU new competence is the energy area – even though Member States are free to decide their own fuel mix. There is little point advocating changes solely in Britain. This is a British and an EU problem.

If Which doesn’t follow-up on this report and pursue the case, who will?

Paul Hunt says:
18 July 2013

As a brief adendum to the previous comment, the European Council meeting in May endorsed the Commission’s proposal to present an “analysis of the composition and drivers of energy prices and costs in Member States before the end of 2013”:

This presumably will be conducted by DG ENER. On previous form DG ENER will conclude that what is required to remedy any problems it might uncover is a more zealous implementation of the Third Energy Package and the associated instruments and targets. This is totally inadequate. Embedding institutional and procedural arrangements that are part of the problem is no remedy. Nothing less than a full DG COMP energy sector inquiry is sufficient.

As an example of how dysfunction on the Continent impacts in Britain one can see how the UK NBP spot gas market functions. Ofgem, in company with the Belgian and Dutch energy regulators, inquired about observations that flows on the Bacton-Zeebrugge and Bacton-Belgzand interconnectors were often lower than price differentials and market conditions would indicate as being efficient – and that flows were often against price differentials (gas flowing from the market with a high price to one with a lower price). It broadly concluded that high commodity charges at the entry to Britain’s gas transmission system deterred imports from the Comtinent and encouraged exports to the Continent.

This may well have an impact, but of much greater importance – and which Ofgem and all the ‘stakeholders’ would never concede – is the fact that the UK NBP sets the reference price for other gas hubs in North Western Europe and certain market players have an interest in keeping prices high at the UK NBP. Many of these players are locked in to oil price-linked, long-term, take-or-pay contracts. Keeping the UK NBP price close to the prices in these contracts will keep these contracts ‘in the money’.

This is but one example of how the abuse of market power by many market participants is imposing excessive costs on final consumers.

Profile photo of ellen

I understand that only one of the big six Energy Suppliers is British owned, and therefore they will follow the trend set by the other five, to remain competitive yet stay within margins. What seems not to be clear is, are the charges made on costs? or due to threatened impending shortages of fuel?
It seems Oil Companies charge what they like, or what they can get away with, this could be the same for Energy charges, they are certainly complex calculations, differing constantly.

My interpretation of this is to make sure in our household we change what we can do, which is use less energy. I am happy to report we are using less than half of the National average fuel consumption, keeping the home really warm, and all home cooked food. Thus preserving the supply at least for a short period. If the wholesale price of fuel changes for what ever reason, and lets face it we cant change that.

Bring the Energy Efficiency Campaign to the forefront, and look at ways to use less, you can start with small actions, and look to change things over a period of time. I can assure you it does make a difference.

The powers that be must look at ways to produce energy without harming the environment like Wave power, after all we are an Island. Solar is expensive but requires less maintenance than Wind Turbines it seems. The idea of Fracking is a step into the unknown, much like the Nuclear Power.

It is evident that the WORD is not out there, from the amount of replies to this kind subject opposed to consumer items such as Coffee shops on the High Street.

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Natural gas seems to have a more asssured future, with the USA likely to become a net exporter, including to the UK. So if you want to keep your bills down, this is probably the best option.
If you are concerned about renewables, then there will be a significant cost involved – wind and solar are expensive partly because of subsidies, and are a bit unreliable – nuclear will be costly to build and provide for waste and decommissioning.
Tidal (tidal stream, tidal storage) and wavepower are estimated to have the potential to supply around 67TWh/y – around 20% of our needs. Reliable, no pollution, but no real urgency in development. Tidal range round the UK is one of the best in the world and could supply up to 12% of our needs – the Severn Estuary was a contender for example but the Government does not see a case for public investment (around £34 billion) but would welcome private inverstment! Perhaps this would be a better candidate than HS2?
I would have thought the reliability, abundance and green credentials of tidal/wave power should be attracting much more urgent attention than it currently is. But do it with public money. All that would happen with private investment would be expensive government guarantees to attract investors -like wind and solar – and we consumers would suffer the high electricity costs that would ensue.
May be off-topic, but whilst we complain about the commercial energy supply companies we could take actions to use public funds for a real public service and provide some competition.

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Malcom R referring to your last paragraph you may like to know that there are Communities already actually taking things into there own hands. Starting small in a fun packed programme, and then achieving huge undertakings. One village near us had scarecrows dotted all over the place to advertise their Green Fete, as well as Green entertainment there was lots of useful information.

The Greening Campaign in Petersfield started by Terena Plowright has over 200 Communities all reducing energy, some Communities like The Brighton Energy Co-op have gone on to large solar installations (on the Roofs of large buildings I believe) funded by investors some as low as £200. All kinds of energy savings are being exploited. There is Nottingham Energy, and a host of other groups taking a real stance over this subject.

This is real people taking real decisions to reduce carbon emissions, and they are growing both in numbers and strength, well done Terena, and the dynamic initiatives of the Energy Co-ops. Together you can move mountains. These will be the people to target Wave Power.

AJGmail says:
15 August 2013

What I don’t think is fair is the rate as which the prices are rising. I’ve just read on yoursuresave.com ‘s twitter page that First Utility are forecasting a 26-30% price increase for 2014.

If this is true then this is absolutely shocking when energyhelpline themselves were only forecasting 10%.

Alec Stanwell says:
4 September 2013

AJGmail – I work at First Utility and I can assure you that this information relating to 26-30% price rise forecasts is absolutely false. We have no idea where this claim originates from as we have made no such forecast and no such announcement. Quite the contrary, we are absolutely committed to keeping prices low for customers and we currently have the cheapest variable tariff on the market.

In relation to this article, we support Which? in their campaign for a fairer wholesale market. As an independent supplier with no generation business we are penalised when it comes to buying energy on the wholesale forward market (because there is not much openly traded) which stops us from passing on greater savings to customers. We’ve been campaigning for similar changes to Ofgem and will continue to do so in order that we can make the market fairer to benefit consumers and increase competition.