Fuel prices debate heats up for winter

Fresh calls to break up 'Big Six' to lower energy bills. Picture: PA
Fresh calls to break up 'Big Six' to lower energy bills. Picture: PA
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THE energy companies and politicians have been warming up for another round of blaming each other for rising fuel prices, as the cold blast of winter approaches,

The issue has shot to the top of the political agenda, with Labour leader Ed Miliband promising price freezes, accusing the government of complacency and the energy companies of profiteering.

While the coalition scrambles to find a unified voice, the big power suppliers have robustly laid the blame on green policy initiatives.

It is a complex market that few completely understand, and thus no surprise that the arguments have generated far more heat than light. About the only thing that everyone seems to agree upon is the need for greater simplicity and transparency.

To achieve this, some have resurrected suggestions that the “Big Six” who produce and sell the majority of the UK’s energy be broken up into separate generation and supply businesses.

Richard Lloyd, executive director of consumer campaign group Which?, was among the first to call for such intervention in the wake of Thursday’s announcement that SSE would be putting its prices up by an average of 8.2 per cent.

The government, Lloyd said, must “make sure everything possible is done to keep prices in check”. However, not all agree that a break-up would translate into lower fuel bills.

David Hunter, analyst with Schneider Electric in Dunfermline, said separating the generators from the supply businesses would make it easier for new entrants to come into the market. Increased competition would, in turn, force down fuel bills.

He declines to speculate on whether those savings would be offset by wholesale prices that are expected to keep rising for the rest of this decade.

“The long-term trend is that energy is going to get more 
expensive,” Hunter said. “It is all the more reason why we need to ensure that the market is working effectively, and that any inefficiencies are being taken out.”

Integrated energy companies such as Scottish Hydro-owner SSE and Iberdrola subsidiary ScottishPower have traditionally used their own power stations to generate most of the electricity they supply. This left only a small surplus to be traded on the wholesale market. It meant that “naked” suppliers – those who don’t own their own generation capacity – were forced to buy their electricity in a relatively illiquid market. Hunter argues that because most 
electricity is not openly traded, the prices are unreliable.

Reforms introduced by regulator Ofgem mean that utilities must now auction 20 per cent of their electricity. Some go further than that – SSE has sold 100 per cent of the power it generates on the wholesale market for the past two years.

The Perth-headquartered group said if its rivals did likewise, there would be no need to break up the integrated heavyweights. “We feel we have made our contribution towards that liquid market,” an SSE spokesman said. “In our representations to the government we have argued that if others would follow suit, that would ultimately lead to lower prices for consumers.”

But sceptics question whether channelling all of the UK’s electricity through the wholesale market would bring down prices. Peter Atherton, utilities analyst at Liberum Capital, said SSE has seen no material decrease in profits from its generating business during the past two years. “Since SSE has been doing that, there has not been a flicker of change in our bottom-line expectations, nor should there be,” he said, adding that there was “not a jot of evidence” that utility bills were going up because of failures in the wholesale market.

Energy UK, the trade body for the industry, said that “there is no evidence that splitting businesses up improves things for customers”.

Atherton goes one step further, arguing that generation and supply businesses counter-balance one another, with one profitable when market conditions don’t favour the other. That’s why in the past, “naked” generators such as Drax and British Energy have gone under, while standalone suppliers like Independent Energy also went to the wall. “We know from history that these companies go bust, because it has happened before,” he said.