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?