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Why SSE raised its prices – The uSwitch Q&A session

SSE has become the first big supplier to announce price rises – find out why below.

Energy supplier SSE has raised its prices

SSE has released a list of questions and answers for customers angry at more pressure on the cost of their household bills. Have a read, and let us know what you think:

When did SSE last change household energy prices in Great Britain?

SSE cut the unit price of gas by 4.5% in March 2012. It last increased gas prices in September 2011 and before that in December 2010, and last increased electricity prices in September 2011 and before that in August 2008.

How many customers will be affected?

Around 5.0 million household electricity customers and around 3.4 million household gas customers in Great Britain.

What will happen to customers’ bills?

From 15 October, SSE’s average standard dual fuel bill, for a customer who pays by monthly direct debit, will be £1,274. This is up from £1,172 and represents an increase of £8.53 per month.

This is based on the industry average annual household energy consumption adopted by Ofgem in November 2010 – 16,500kWh of gas and 3,300kWh of electricity – and reflects the changes to both the fixed standing charge and energy unit prices.

Does the commitment not to increase energy prices again before the second half of 2013 mean that prices will stay fixed at the 15 October 2012 level?

Not necessarily. A sustained fall in wholesale energy costs would allow household prices to be reduced – as SSE was able to do in March this year.

When will SSE’s customers find out more about the price increase?

Energy suppliers are required to give every affected household customer at least 30 calendar days’ notice of any price increase.

This means affected customers should receive a letter from SSE by 14 September 2012. In the meantime, information is available now on SSE’s customer websites.

Why do prices need to go up?

Earlier this year, a typical dual fuel SSE customer benefited from a 2% reduction in their total bill as a result of SSE’s 4.5% cut in gas unit prices, but since last winter three things have been putting upward pressure on domestic energy prices:

– first, the costs of using the energy networks to distribute electricity and gas to customers’ homes, which are determined by Ofgem and represent around 25% of a typical bill, are 9% higher than they were a year ago4;

– second, the cost of mandatory environmental and social initiatives that suppliers are required to fund and pass onto customers, like the Carbon Emissions Reduction Target (CERT) and the Warm Homes Discount, are 30% higher than they were a year ago5 and now represent around 10% of a typical bill.

– third, the average price6 in the wholesale energy markets to secure gas for the coming winter is around 14% higher than it was for last winter. The wholesale cost of energy represents around one half of a typical dual fuel bill.

What accounts for the 30% increase in the cost of government-sponsored mandatory schemes that are passed onto customers?

A typical customer is currently paying over £120 to fund government-sponsored mandatory schemes.

The majority of the increase in the cost of these schemes in the last year is accounted for by the dramatic increase in the costs of meeting the Carbon Emissions Reduction Target (CERT).

Under CERT (and CESP), energy suppliers are required to locate “hard to reach” groups of people and provide them with eligible energy efficiency measures, but have been given little information with which to reach these customers.

As a result, the cost of individual measures eligible for inclusion in this scheme, such as loft and cavity wall insulation, have more than doubled in the last year and are continuing to increase as energy suppliers compete for the limited number of opportunities that will enable them to meet their targets ahead of the December 2012 deadline. In the last year SSE has seen these costs rise by over £100m.

SSE firmly supports the principle of improving the energy efficiency of customer’s properties, but this must be done in a way that is cost effective for all customers. The artificial ‘cost bubble’ created by the way current targets have been set is placing an upward pressure on overall energy prices.

SSE is no longer confident that GB domestic energy customers are funding a cost effective scheme and believes action must now be taken to review this. In addition, the Government should take these issues into account as it prepares to launch the new Energy Company Obligation (ECO) in October.

Why are these price increases bigger than those forecast by the Bank of England in its recent Inflation Report?

The Bank of England forecast that energy prices would rise this year because of increased costs being faced by suppliers, but SSE believes that its estimate of the extent of the increase did not adequately reflect the impact of higher energy, distribution and social and environmental costs. For example, to cover the increase in non-energy costs during the last year alone requires a 6% or £67 increase in a typical customer’s bill.

Why do smaller suppliers appear to be able to make smaller increases in their prices?

Smaller suppliers typically face a different set of cost pressures to larger suppliers. Smaller suppliers often have to raise prices more quickly and frequently in response to volatile wholesale energy prices or rising non-energy costs, but usually this means that the percentage increase for each change is lower.

In addition, smaller suppliers are also not required to fund the majority of government-sponsored mandatory schemes such as energy efficiency measures, feed-in-tariffs, and support for vulnerable customers. As a result they do not need to pass on these costs to their customers, which represents a current cost saving of around £90 per customer. This also means that when the costs of these schemes are rising, as they have done over the last year, these increases do not have to be reflected in an increase in domestic prices by smaller suppliers.

How much will SSE’s new standing charge be?

Customers will pay a standing charge of £100 per year per fuel (inc VAT). This will be shown on a customer’s bill as a 27.41p (inc VAT) per day charge covering the period of the bill, so customers will be able to see exactly how it has been calculated.

SSE’s £200 (inc VAT) standing charge for a dual fuel customer will be equivalent to the average of that currently levied by the other major UK energy suppliers who have a standing charge, which range from £130 to £257 (inc VAT).

Over 60% of SSE’s customers currently pay their bill via Direct Debit.  Under SSE’s new discount structure (see below), these customers will receive a £40 per fuel, per year discount on their standing charge in future.

Why have you introduced a standing charge for all customers?

Customers, consumer groups and Ofgem have made clear that they want greater simplicity in the products all energy suppliers offer. SSE has already responded to this by significantly reducing the number of products and tariff choices it offers and is now changing the structure of its tariffs to make them easier for customers to understand and compare.

SSE’s tariffs have historically recovered the fixed cost elements of a customer’s bill either through a fixed standing charge or through a two tier unit rate Nil Standing Charge (NSC) tariff, – where the first block of units used incurred a higher cost than subsequent units and the difference between the two unit rates recovered the fixed costs.

It is clear that many customers find the two tier unit rate approach confusing. So in line with its commitment to create a simpler approach for customers, from the 15 October 2012 SSE will move the vast majority of its customers onto a simple fixed pence per day standing charge (equivalent to a £100 (inc VAT) per year, per fuel) and a single unit rate for the energy consumed.

Learn more

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