The Big Energy Price Rip-Off
It’s less than six months after a round of winter price hikes, but the UK’s energy companies are at it again.
In July Scottish Power raised its gas prices by 19% and electricity prices by 10%. British Gas, now owned by Spanish giant Centrica, followed very shortly with 18% and 16% rises to its gas and electricity prices. The other four are soon expected to follow suit.
The move places every single household in the UK under pressure and, according to the publicly funded consumer advocacy group Consumer Focus, will add £72 to average annual bills and place and extra 1 million of households into ‘fuel poverty’ – when a household is spending more than 10% of its income on keeping warm. This figure is set to rise as the other energy companies join in the price rises.
According to Audrey Gallacher, Director of Energy at Consumer Focus, a government funded consumer advocacy group: ‘Double digit price rises will be a huge blow for consumers. Many people will question whether these hikes can be justified given that customers didn’t feel the benefits when wholesale prices were low and the big profits that are being made.”
The rises, say the energy companies are necessary. The wholesale price of energy – that is the price they pay on the open market – is going up. They have shareholders to please and, they claim, need increased profits to invest in a new energy infrastructure for the future. However, a 2008 study by the Local Government Association found that while profits and dividends paid to shareholders continue to rise, the money generated from higher retail prices is not necessarily being invested in new forms of energy or the future.
But data from government regulators Ofgem shows that while energy companies, which are quick to pass on rises in the wholesale cost of energy to their customers, they are slow to lower them again when those prices drop. Says an Ofgem spokesman: “The findings of our investigation in March showed that energy companies were bamboozling consumers with too many complex tariffs”. It further showed “that the retail market was not working as it should and that competition was being stifled by a combination of tariff complexity, poor supplier behaviour, and lack of transparency.”
Energy Secretary Chris Huhne, suggests that higher bills are not inevitable if consumers shop around and switch to a lower tariff: “Consumers don’t have to take price increases lying down. If an energy company hits you with a price increase, you can hit them back where it hurts – by shopping around and voting with your feet.”
But switching isn’t straightforward. The number of tariffs currently available is staggering; up from 180 to more than 300 since 2008. There is evidence that due to the complexity of the system, those who do switch may not always end up on the cheapest tariff. Indeed new Ofgem data suggests that 40% of those who switch get a worse deal.
Switching largely favours the more affluent – the ones who can pay large lump sums a few time a year – rather than those who need to pay in smaller regular amounts throughout the year so is unlikely to help those who need it most.
Whatismore the advice to switch misses the point that shopping around for energy is not the same as shopping around for TVs or shoes or cornflakes. None of us have the option of not buying energy this week or this month if the price is too high.
The frustrating truth is, no matter how tough consumer groups and government agencies talk, the energy companies continue getting away with it because they can.
While the Big 6 were officially cleared of being an actual cartel in 2008, after a 7 month enquiry by Ofgem, the fact is their stranglehold on the market means they can continue set the retail price, as a group and without any meaningful restriction. As a spokesman for Consumer Focus has noted: “The big six tend to hunt in a pack. When one goes, they all go.”
Ofgem, is currently undertaking another review into the Big 6 to determine whether their dominance distorts the market and encourages profiteering.
It is against this backdrop of consumer anger and grief that more and more calls for energy reform are being made. Ofgem wants to force energy companies to publish more detailed accounts for their retail businesses and over the longer term, to make the Big 6 auction off up to 20% of their power generation to make it easier for existing smaller suppliers and more attractive for new competitors to enter the market.
Chris Huhne is also arguing the case for more wide ranging reform. His recently introduced Electricity Market Reform White Paper aims, he says, to restructure the energy sector by 2030 with a £200 billion investment in a cleaner, more secure energy supply – a cost that analysts say will inevitably be borne by customers, including domestic users.
DECC argues that prices are going to go up either way and that the proposed reforms will mean prices rise less steeply than they would otherwise; by around £160 in 2030, compared to increases of around £200 without market reform.
There is no doubt that we need an energy revolution and the attempts at reforms are broadly welcome. But as always the devil really is in the details.
Says FOE energy campaigner Paul Steedman the proposed reforms mean that Britons continue to throw good money after bad by asking billpayers or taxpayers to cough up for dirty technologies such as nuclear and gas.
“There’s no doubt that our energy system needs a multibillion pound upgrade. But the Government’s plans leave the door open for a new wave of gas power stations, while forcing UK billpayers’ to subsidise French state-owned EDF’s plans for new nuclear plants.”
It also, says Steedman, keeps us “locked in to an expensive energy system powered by polluting coal and gas”.
Revolutionising how our future energy is generated, “breaking the power companies stranglehold and helping new businesses, local authorities, community groups and householders invest in the UK’s wealth of wind, wave, tidal and solar power” says Steedman, is the key to cheaper bills and a cleaner environment.
Crucially – and in common with many government approaches to energy reform – the proposed EMR does not address the issue of consumption. MP and environmental campaigner Zac Goldsmith, who has sat on the Parliamentary Committee scrutinising the Government’s proposed Energy Bill, believes this must be part of our approach to future energy reform:
“It’s hard to underestate the huge impact these recent price rises will have right across the board for consumers. With so much concern and confusion in the here and now it can be hard to take a longer view. But the fact is we are now at an important crossroads in the history of UK energy consumption. The path we choose is hugely significant. The real cost of energy is going up and will keep going up because fossil fuel supplies are dwindling. Rethinking how we generate energy is of course crucial but it’s equally important to ask how we will use that energy once it is generated.”
It might not be apparent from Government plans, but Britain has one of the richest sources of renewable energy in the world. It would require less a third of our useable offshore wind, wave and tidal resources could to meet all our electricity needs, while solar PV alone could meet 30 per cent of our electricity needs. The renewable energy sector can also generate thousands of jobs – 66,000 by 2020, just from offshore wind.
The benefits to the consumer are tangible in the here and now as well as examples from abroad show. Germany, for instance, is abandoning its nuclear programmes in favour of a 100 per cent renewable future. There consumers are reaping the reward for their investment in renewable energy to date with energy prices that are lower than three years ago.
FOE believes that with the right policies, the UK can exploit its position as the ‘Saudi Arabia’ of renewable energy and become a world leader in renewable energy with the new industries, jobs and economic benefits this brings. Whether the government – and the Big 6 – are ready to help us take the lead remains to be seen.
In the midst of all these price rises, British Gas owner Centrica announced profits of £1.3billion in the first half of 2011, enough to give shareholders a 12% increase in dividends. Rather than passing future costs for a new energy infrastructure onto already stressed consumers, wouldn’t it be better if energy companies invested some of those profits in a more secure energy future?
This is an extended version of an article that appeared in the October 2011 edition of the Friends of the Earth magazine Earthmatters.
© Pat Thomas 2011. No reproduction without the author’s permission.
