High energy prices must be investigated

Money Talk
By Allan Asher
Chief executive of Energywatch

Allan Asher, chief executive of Energywatch

How come the energy market now finds itself under investigation?

It is constantly referred to by the government and regulator as "the most competitive in the world".

Yet it finds itself under sustained attack across the media, from user groups large and small, and has been the subject of 15 Parliamentary motions and debates.

Why, when you remove tax, are electricity prices in the UK the fourth highest in Europe?

Competition

Just 10 years ago, the UK energy market was revolutionised.

There has not been a single new retailer entering the market for years

The power generators, and owners of the gas pipes and wires, were broken up and sold off and in 1998 full retail competition started.

In the early years, with intense competition, prices fell significantly.

A very positive side effect of this was that more than six million British families who were forced through poverty to choose between "heating or eating" during winter, were reduced to one million.

Now though, the number of energy suppliers has fallen from more than 20 to just six.

Worse still, they have bought six of the nine independent power generators.

So they have a major influence on setting both the wholesale and retail price of the power we use.

And because so much of the generation sector is controlled by the suppliers that explains why there has not been a single new retailer entering the market for years.

Rising bills

Gas and electricity bills have been rising relentlessly over the past five years.

When wholesale gas prices plummeted by as much as 50%, and consumers foresaw a brief respite, the average price reduction in gas and electricity bills was only around 16%.

But in the closing months of 2007, when oil prices rocketed and wholesale gas prices followed, the suppliers wasted no time in passing on the pain.

In a sudden flurry over five weeks at the beginning of this year, five of the big six suppliers hiked gas and electricity prices.

If these businesses are so fiercely competitive, and have different strategies and purchase their gas in different parts of the world, why is the price difference between them in their most common dual-fuel, direct-debit product, just 25p a week?

Switching

The usual industry and regulator's response to claims of unfairness about pricing is to say consumers should switch. Many consumers do.

Switching is just not working for the most vulnerable

Last year four million out of 36 million energy account holders did so.

But it is also the case that just under half of consumers have never switched supplier and market research suggests they are unlikely to.

Amongst aged pensioners, only around a third have ever switched, while the 6 million consumers with prepayment meters are unlikely to be able to switch using the convenient online switching services.

The two million consumers in debt are prohibited from switching by the suppliers, and hundreds of thousands more in Scotland are prevented from switching through technical restrictions on their accounts.

The reality is that switching is just not working for the most vulnerable.

Investment

When prices started rising in 2004, we were assured that the planned £10 billion in infrastructure investment, and a range of other measures, would prevent any annual winter price hikes.

The investment would bring on-stream new pipelines, new gas fields, and terminals for importing liquefied natural gas from different sources

Despite this, we are still stuck with the higher prices and new threats from the suppliers that we can expect to see more of the same next year.

That is why consumers, the media and members of Parliament are so concerned about the energy supply sector.

So, Energywatch is calling for the referral of the industry to the specialist Competition Commission for a thorough review to ensure that the energy industry is in shape for the challenges of the coming decades.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.