Power firms to grab £3.4bn extra profit

Published on Friday 18 September 2009 22:11

BRITAIN'S big six energy companies have rejected calls to cut prices, despite a halving in the wholesale cost of gas and electricity over the past year.

A report by Ofgem, the energy watchdog, has revealed that energy companies will be earning 170 profit from each dual-fuel customer over the next year – up from an average of 110 a year over the past three years.

The big six companies will earn an estimated extra 3.4 billion in profit over the next 12 months if they fail to pass on price falls to consumers, according to energy consultants Ineco.

Politicians and campaigners said there was now scope for significant price cuts this year for more than 26 million customers and accused the energy companies of indulging in "a chorus of excuse and self-justification".

Alistair Buchanan, the regulator's chief executive, wrote to the six companies last month telling them that "they owe it to their customers to better explain their pricing position to them". But replies to Mr Buchanan's letter published yesterday showed that the companies – ScottishPower, Scottish & Southern Energy, British Gas, E.ON, RWE and EDF Energy – have no plans to trim prices.

Data from the watchdog Consumer Focus shows ScottishPower has increased dual-fuel prices by the most since 2003 – up 148 per cent – with a decrease of just 0.6 per cent so far this year.

Ofgem said the margin was set to rise again by about 60 for a dual-fuel customer over the next six months, in spite of projected falls in wholesale energy costs of nearly 30 for electricity and 85 for gas. It forecast wholesale energy costs would start rising again from the second quarter of next year.

Depending on how efficient 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. Wholesale gas costs have dropped by an average of 10p per therm, or 59 per customer.

The energy suppliers are all arguing there will always be a time-lag between wholesale price movements and any changes to customer tariffs.

Centrica, the owner of British Gas, which has 16 million customers, even raised the prospect of further retail price rises.

Chief executive Sam Laidlaw told Ofgem: "Prices (are] likely to remain at historically high levels and in fact likely to increase as non-commodity costs rise ever upwards."

The wholesale price of gas and electricity accounts for only about 60 per cent of consumer bills, Mr Laidlaw said. The remaining 40 per cent, such as the cost of meeting government targets to produce a third of electricity from renewable sources by 2020, "over which suppliers have no control", are still rising steeply, he insisted.

ScottishPower said: "There are no immediate signals that would indicate a fall in retail prices for this winter, and risks of an increase next year." Scottish & Southern Energy also said it was battling against pressure to raise prices by the end of next year.

But Trisha McAuley, the head of services and advocacy at Consumer Focus Scotland, said: "There's a grim predictability about Scotland's energy suppliers. In spite of increased margins and lower wholesale gas prices, there is the inevitable talk of higher domestic bills.

"While the extra transparency on prices is welcome, the companies' answers are not.

"Consumers rightly expect to benefit from the fall in wholesale costs, and the excuses given by the companies for not reducing prices simply don't stack up.

"Despite the volatile wholesale markets and environmental costs, we think that there is scope for price cuts this year.

"A strong competitive market would deliver lower prices. Instead, our energy market delivers a chorus of excuse and self-justification."

Ineco said cuts of up to 10 per cent on retail gas and electricity bills were now fully justified.

Peter Luff, MP, chairman of the business and enterprise committee, said energy markets were "not working properly".

Pauline McNeill, Labour MSP for Glasgow Kelvin, said: "This issue should be pursued vigorously, with the energy firms being challenged about exactly how they are conducting their business.

"Vulnerable people will put paying their fuel bills before feeding their families and themselves, and need every bit of help they can get. It sounds from this report that there are some reductions which can be passed on."

Douglas McLellan, a policy adviser for Age Concern and Help the Aged in Scotland, said: "Prices fell marginally earlier this year, reflecting a change in the wholesale market. However, it is not right that fuel companies should, in effect, profiteer from widely reduced supply costs themselves."

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

Its third quarterly analysis suggests there is now scope for the firms to do so.

The average annual household energy bill is 1,239, down just 3 per cent from a high of 1,293 in January. Bills are still 18 per cent higher than a year ago, when they stood at 1,048.