Page last updated at 19:37 GMT, Friday, 18 September 2009 20:37 UK

Energy bills 'unlikely to fall'

Gas hob
Energy firms have rejected calls for swift price cuts

The big six energy suppliers have told the regulator Ofgem that there is little chance of any further cuts in their tariffs this coming year.

They were responding to calls from Ofgem for them to pass on more of the recent falls in wholesale energy costs.

However, while Ofgem had requested that the companies do so, it has no power to enforce any tariff cuts.

Peter Luff MP, chairman of the Business and Enterprise Committee, said energy markets were "not working properly".

Ofgem estimates lower costs will boost suppliers' gross profit on each dual-fuel customer by £60 this year.

The firms say other costs which make up 40% of bills are rising steeply.

Consumer Focus said the industry's responses were a "chorus of excuse and self-justification".

"In spite of increased margins and lower wholesale gas prices, there is the inevitable talk of higher domestic bills," said Robert Hammond of Consumer Focus.

Response

In August, Ofgem wrote to the chief executives of each of the big six energy firms, urging them to "respond" to falling wholesale prices as some poorer customers would be suffering hardship from high prices during the winter.

Depending on how good suppliers were at buying their energy in advance, the regulator says their wholesale electricity costs have fallen in the past six months by more than £7 per megawatt hour, equivalent to £29 per customer's annual bill.

My committee warned the government and Ofgem last year that the energy markets were not working properly... this is further compelling evidence that that is the case
Peter Luff MP, chairman of the Business and Enterprise Committee

Meanwhile gas wholesale costs to the energy companies have dropped by an average of 10p per therm, or £59 for each customer's bill.

A spokesman for Ofgem stressed that the regulator did not have the power to force energy firms to trim prices, and instead that it could only act against energy companies if it finds evidence that they have acted anti-competitively.

He added that while Ofgem wanted the energy firms to trim their bills, there was no suggestion that the current high prices suggested anti-competitive behaviour.

However, Mr Luff, whose Commons committee studies the UK's energy market, said: "Ofgem can't stand by and watch customers pay excessive prices.

"My committee warned the government and Ofgem last year that the energy markets were not working properly... this is further compelling evidence that that is the case."

No cuts likely

The big six firms were united in rejecting the suggestion they should agree now to cut tariffs in the coming months.

Hugh Pym
Hugh Pym, BBC chief economics correspondent

Ofgem has made clear it has found no evidence of anti-competitive behaviour by the energy firms.

So effectively all it can do is bring the high prices to the attention of the public.

In essence, Ofgem is trying to shame the companies, but so far the firms are insistent there will be no price cuts, and in fact some have warned that prices may have to rise.

If Ofgem is to have the power to force energy firms to cut their bills, it is up to the government to give that to the regulator.

Some even hinted that customers' tariffs might be higher in a year's time.

British Gas - "Prices [are] likely to remain at historically high levels, and in fact likely to increase as non-commodity costs rise ever upwards."

EDF Energy - "We would of course be prepared to reduce tariffs if market conditions allow."

E.ON - "[We] do not believe there is a clear message regarding future wholesale costs movements that can be communicated to customers."

RWE - "A retail price commentary cannot be based only on a narrow view of wholesale costs and in any event wholesale costs need to be weighed against increases in other costs."

Scottish and Southern Energy - "With forward annual wholesale prices significantly higher, and with upward pressures in terms of distribution, environmental and social costs, seeking to avoid an increase between now and the end of 2010 is an important goal."

Scottish Power - "There are no immediate signals that would indicate a fall in retail prices for this winter, and risks of an increase next year."

Falling costs, higher profits

The regulator's previous two quarterly reports on the relationship between wholesale and retail prices found that there was no evidence that suppliers had failed to drop prices when costs fell.

If retail prices do not change, these lower cost will be reflected in higher gross margin
Ofgem

However, its third quarterly analysis suggests there is now scope for the firms to do so.

Ofgem estimates that the gross profit of each of the big six firms for the next year will amount to an average of £170 per dual-fuel customer.

That compares to an average gross profit of £110 over the past three years.

Looking ahead by 12 months, Ofgem estimates that the wholesale cost of electricity will fall by around £25 per customer and that of gas by around £40.

"If retail prices do not change, these lower cost will be reflected in higher gross margin," Ofgem says.

Volatile costs

The gross margin made by energy firms has to cover their every-day running costs, such as paying staff and selling their services, and so does not automatically translate into profits either for further investment or dividends for shareholders.

Ofgem acknowledged that energy firms also have other important costs which push up domestic and industrial bills.

Among them are the cost of subsidised "social tariffs" for poorer customers, and the cost of dealing with the bad debts of those customers who cannot pay their bills.

The bills that customers do eventually pay are also heavily boosted by the cost of paying for the transportation and distribution of gas and electricity around the national networks, and the cost of meeting the government's environmental obligations.

These cannot be controlled by the energy suppliers and are passed straight on to the consumer.

Overall, these extra costs now make up £360 of the average annual dual-fuel bill, compared to the £597 wholesale cost of the fuel itself.

Ofgem also noted that firms may start to face higher wholesale energy costs in the spring of next year.

The firms argue that there will always be a lag between wholesale price movements and customer tariffs.

"Prices are very volatile," said Andrew Horstead of energy consultants Utilyx.

"If they were fed through immediately consumer bills would naturally be very volatile," he added.



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