In today’s blog:
You asked the energy suppliers about prices and tariffs, including how they justify price rises and why their tariffs are too confusing. Read on to find out how British Gas, EDF and ScottishPower answered.
The suppliers tackle your questions on billing.
How can the energy suppliers justify such huge price increases at a time when
household budgets are already severely stretched?
British Gas: Firstly, it’s important to remember that the price of energy is only part of the picture. Almost half the cost of gas is made up of other fixed costs, such as transportation and distribution charges, metering costs, Government environmental contributions and tax etc –these costs have also been increasing.
Secondly, with our North Sea gas supplies running out, we have to buy more than 50% of our gas from countries around the world. This means we have to pay the market rate, which has increased by more than 30% in the last year. As a result, we were selling gas at a loss for some time this year – a position which is not sustainable for any company.
We weren’t the first to increase our energy prices and others have since followed. Remember, in the last two years we lowered our prices twice – in January 2009 and again in February 2010. Those price cuts reduced our customers’ average annual bill by £188. This demonstrates that when it’s possible, we do reduce your energy prices.
EDF: As a responsible company, we are committed to competitive prices and fairness to our customers and at the same timemeeting the huge requirements for investment in Britain’s energy infrastructure.
We have absorbed rising wholesale energy, network and other costs as long as possible but must reluctantly now pass some of these through to consumers. However, unlike some other suppliers we have been able to give protection to our customers, particularly for their electricity consumption, because of our choice to invest in low carbon nuclear generation, which enjoys stable costs compared to gas and coal and has had a strong performance this year.
Why are the Big Six so slow to reduce prices when the price of oil drops on the open market/ but have no hesitation in raising it as soon as it goes up?
British Gas: The majority of the costs that go into your bill are outside of our control and made up of wholesale energy prices, government taxes and environmental contributions. The price of wholesale gas has increased by 30% in the last year alone. When we can put prices down we do, and we have dropped our prices three times in the last two years.
EDF: We treat wholesale price increases and decreases the same. Over the last few years, EDF Energy has actually limited the impact of wholesale price increases to its retail and SME customers. There is a deliberate lag between wholesale cost movements and costs feeding through to the residential market to protect customers against big swings in wholesale prices such as those we have seen recently.
Why do prices take so long to come down?
British Gas: We do not believe this to be the case. Ofgem recently analysed the potential for such behaviour and was unable to reach a conclusive response. Since then, NERA, an independent economic consultant, conducted a similar study and said there was no evidence of lagging or leading pricing behaviour.
When energy companies are making such big profits then why are customer prices still going up?
British Gas: British Gas understands concerns regarding profits. Our profits equate to only 5% of the average annual bill and we reinvest that money here in Britain to develop and secure further supplies within the UK. This will help us to avoid relying on more expensive imports to keep our homes warm.
EDF: We are committed to providing our customers with the most competitive prices we can. Our profit is based on a year by year basis. We need to ensure we remain profitable for the future so we can continue to invest in building low carbon energy infrastructure to keep the lights on. We have to balance being fair to our customers, whilst delivering a fair return to our stakeholders.
Why do you raise prices when the wholesale prices are falling?
British Gas: Energy suppliers purchase energy on wholesale markets. As North Sea gas production declines, the UK has to import increasing amounts of gas from abroad. This imported gas increases the volatility of UK prices as it is more strongly impacted by external factors such as the price of oil and is subject to global events. In 2011, the UK will import around 50% of the gas it needs.
Most companies estimate what customer demand will be, what future wholesale prices will be and aim to buy sufficient energy in advance at a competitive price.
However there are lots of factors that can influence future demand and prices which are beyond our control, such as the weather. A colder than expected winter or a warmer than expected winter will alter customer demand and impact the wholesale price of energy.
Ofgem, in its latest Electricity and Gas Supply Market Report (June 2011) highlighted that gas prices have had a strong upward shift in the first six months of 2011 as a result of the situation in Japan and events in the Middle East. The regulator indicated that the price of gas for winter 2011/12 is around 30% higher than the price for gas in winter 2010/11.
Wholesale electricity prices have also seen a strong uplift since mid 2010. Average power prices for winter 2011/12 were 48.66p/therm in June 2010 compared to 58.18 p/therm in June 2011. This is an increase of 20%.
To manage unforeseen factors and in order to ensure there is sufficient energy for customers at the most competitive prices, energy suppliers employ hedging strategies, to decide what proportion of their energy should be bought ahead on the forward markets, as well as buying it on the day, know as ‘day-ahead’. Hedging not only enables smoother retail prices – protecting the customer by reducing the need for more frequent price changes and uncertainty – but also guarantees a secure supply of energy.
Wholesale prices on any given day are therefore not a good indicator of suppliers’ wholesale costs, nor are short term products such as within-day or day-ahead products.
ScottishPower: ScottishPower like other suppliers adopts a hedging strategy, which means that it purchases a significant proportion of its energy in advance. This allows us to protect customers from sharp increases in the wholesale market. There is however only so long before we need to pass increases onto customers. For example, prior to raising our prices in August this year, wholesale Market Prices had risen significantly, with Electricity up 20% and gas up 30% from November 2010 – influenced by the Arab Spring, Fukushima accident and economic environment.
Why are the tariffs so complicated to understand?
British Gas: British Gas agrees that tariffs have been complicated for customers to understand which is why we have now simplified our energy tariffs so customers can build a simple tariff that best suits their needs in three simple steps:
1. Customers now have a straightforward tariff choice – fixed and variable;
2. They can then choose how they want to manage their energy account – online or with paper bills and free access to British Gas call centres; and
3. Finally, customers choose how they pay, spreading payments, or paying just for what is used, by direct debit, cheque or cash.
EDF: As a result of customer feedback, EDF Energy is currently selling only five tariffs:
– Fix for 2012
– Price Protection 2013 + welcome bonus
– Price Protection 2014 + welcome bonus
– Standard (Variable)
Furthermore, EDF Energy is committed to ensuring all of our customers get a fair deal over the winter period, without having to switch tariffs or sign contracts. That’s why, although we had to increase prices this month due to rising wholesale market costs, our price change was the last of all the major suppliers, and was the lowest rise.
So, going into the second successive winter, EDF Energy still has the cheapest standard dual fuel prices of all themajor energy suppliers, meaning a fairer deal for all of our customers.
In addition EDF Energy has committed to freeze these prices until at least Spring 2012. This follows EDF Energy’s Winter Price Freeze Guarantee of 2010/11, when EDF Energy was the only major energy supplier not to raise prices over the winter period.
Why can’t there be a standard flat rate why have a base rate and second rate?
EDF: Following customer feedback, we decided to improve the simplicity and transparency of our bills by extending our online and fixed price tariff structure to all tariffs, eliminating banded pricing in March of this year. All customers will now pay a standard unit rate for all energy consumed, plus a small standing charge per day to cover fixed costs.
Why is energy charged for at 2 different rates, one below a certain number of kwh and another for over that amount of kwh? Surely it would be much simpler to charge a flat rate for ALL kwh used?
British Gas: It is important to remember that the price of the gas or electricity is only part of the picture. Almost half the cost of gas is made up fixed costs, such as transportation and distribution (including the network of pipes or the electricity grid) and metering costs.
These costs do not change regardless of the amount of energy consumed. There are different approaches amongst the suppliers in how these are covered in the tariff. British Gas and some other suppliers currently use a higher price for the first portion of units and a lower subsequent rate. Some others charge a fixed quarterly or monthly amount and a single unit rate for the energy used.
Finally some smaller suppliers have a single rate. There are pluses and minuses to each as some groups of customers might potentially see higher or lower bills depending on the amount of energy used. There are no easy answers which is why we are inviting our customers to give us their views on how they want us to make their energy less complex, simpler and more transparent.