SSE yesterday announced that they would be increasing the average household’s energy bill by 8.2% on 15 November. A figure which will see a typical SSE dual-fuel energy tariff plan cost £1,224 per year, adding an extra £111 and putting unwelcome pressure on close to 10 million households just ahead of winter.
We asked the SSE’s Director of Retail Economics, Richard Westoby to explain the reasoning behind the price rises.
SSE on price rises
In recent years energy suppliers have faced upward pressures on the many costs which make up your electricity and gas bills. This has led to rising energy prices and, unfortunately, we’ve had to announce that our prices for both gas and electricity will rise by an average of 8.2% from 15 November.
The UK has some of the cheapest gas and electricity prices in Europe and, with over 20 players in the energy market, consumers can shop around for the best deal.
Yet the underlying trend in prices is a matter where suppliers have limited influence. About 85% of a typical bill is made up of costs outside of our direct control. So when we make the difficult decision to put up our prices it is because the many upward pressures on costs have reached a point where we have little choice.
The price of energy on the global wholesale markets is higher than last year
The costs of energy only account for around half of your bill, yet it is common knowledge that the price of energy is increasing due to:
• Rising global demand, particularly from China and the Far East;
• The impact of geopolitical events like the situation in the Middle East or Japan’s decision to use more gas after it closed its nuclear power stations after the Fukushima accident;
• The increase in the amount of gas that the UK has to buy from other countries and the reliance Europe has on Russian gas.
UK energy suppliers compete in a global market for the energy we need. We always look to secure energy either from electricity generators or upstream gas producers as cheaply and reliably as possible. To protect our customers from volatile global prices we often buy the energy we need well in advance, sometimes two or three years before. As a result, short-term changes in the wholesale price of energy are not reflected in the prices customers pay; it is the long-term trends that matter.
The UK needs to fund critical improvements to its electricity and gas networks to accommodate new forms of generation and these costs have been increasing each year
All energy suppliers have to pay to use the networks which transport electricity and gas to customers’ homes. The costs make up a quarter of your bill and are overseen by independent regulator Ofgem.
The money you pay in your bill goes towards the cost of building, maintaining and operating the local gas pipes and electricity wires on your street, as well as the pylons and high-pressure gas networks used to transport energy across the country.
The UK’s energy network needs to be upgraded to accommodate new renewable energy and forms of generation such as wind and photovolatics. That is why the costs you pay your supplier to use these networks are increasing to provide a steady income stream to the companies which own the networks so that they can make essential investments which are as cost-effective as possible for bill payers.
The costs of government schemes collected through energy bills have more than trebled since 2005
Over recent years, successive governments have introduced a number of energy policies which are paid for through your energy bills. These costs make up around 10% of your bill and pay for:
• Policies to improve the energy efficiency of the UK’s homes;
• Incentives to encourage the development of low-carbon forms of energy;
• Policies to incentivise householders and small businesses to install their own small-scale electricity generation, such as solar panels;
• A £135 rebate suppliers pay to their elderly and vulnerable customers.
Most people are unaware that they pay for these costs in their bills (Consumer Futures’ research found 9 out of 10 people did not know). Yet the costs are expected to continue to increase as we invest more money in low-carbon technologies and make essential improvements to the UK’s homes.
We support these policies but think it would be more progressive to pay for these policies through general taxation, which is means-tested, not through energy bills. Removing these costs from bills would also wipe over £100 off the average bill and means that those who can afford it pay more, thereby protecting those who may be struggling to meet their energy costs.
What the headlines don’t tell you
When we raise prices it is to reflect cost increases and it is not “profiteering”. There are two important questions when it comes to energy company profits: 1) are they fair and 2) where does the money go?
1) We make around 5p in the pound from supplying energy and most people agree that’s a reasonable amount to make for the risks we take on. SSE does more than just supply energy to customers; we also do other things like generating electricity. Our generation business typically makes a higher profit margin, but it needs to do this in order to maintain a significant investment programme. It’s a bit like paying off a mortgage: we need enough of a return to pay back both the investment itself and the cost of borrowing the money.
2) The money we make is used to fund critical investments in the UK’s energy infrastructure; as a group SSE invests more each year than we make in profits (the equivalent of £4 million every day). We also use the money to pay our taxes and employ thousands of staff across the UK and Ireland.
We can do a lot to help
Rising prices do not have to mean rising bills. Making your homes more energy efficient really can make a difference, and it already has for many people. If energy usage had stayed at 2005 levels, the average bill would be around £400 more than it is today.
There are schemes out there to help people improve the energy efficiency of their homes – please take advantage of them if you can – and there are lot of ways we can help you with your energy costs. If you think you may need assistance with your energy costs please call us on 08000 727 222.
In conclusion, although we can’t control the general trend in prices, we can control how hard we work to help our customers and the standard of customer service we provide. We have been voted the best major energy supplier for customer service, as voted by uSwitch users, seven years in a row in the uSwitch Awards, and in light of the difficult decision we’ve made this week, we’ll be redoubling our efforts to make sure we remain the best in the business.
Richard Westoby, Director of Retail Economics, SSE