As winter approaches, millions of consumers in the U.K. are worrying about the high cost of heating their homes, yet energy suppliers are reluctant to cut energy prices until winter bills have boosted their profits. Scottish and Southern Energy, the second largest energy supplier in the U.K. with 9 million customers, recently revealed profits of just over £410 million for the last six months, up 36% on the same period last year. British Gas however, is the largest energy supplier in the country with 21 million customers and its parent company, Centrica, recently confirmed that its residential arm is on track to make a profit of £541 million this year, up 43% from £379 million in 2008. This was despite the fact that its customers actually used 7% less gas in the first nine months of the year and the wholesale cost of gas and electricity fell by 50% compared with last summer and by 25% compared with the start of the year.
Wholesale energy cost reductions are rarely passed on to customers however and British Gas customers have seen reductions in their bills of just 10% this year. In fact, a recent Government review of the industry revealed that, despite the fall in wholesale prices in the last year, the average cost of a unit of electricity to domestic consumers has increased by 100% in the last decade and the average cost of a unit of gas by 70% in the same period. The announcement of huge profits for energy suppliers has, understandably, provoked fury amongst consumer groups. Roger Hammond of Consumer Focus, for example, was recently quoted on the Telegraph website, saying, "The fact that price cuts aren't being fairly passed on shows the competitive energy market isn't working. We now need a Competition Commission investigation to address the problems in the energy sector."
British Gas Profits
Centrica has said that it expects its total operating profit, which includes that from its power generation and gas production divisions, to be £1.86 billion, down 4% on last year, but was nonetheless keen to defend the anticipated increase in profit from British Gas. A margin of 7% is necessary to maintain investment in energy infrastructure, such as wind farms, power plants, etc., which will amount to £3 billion this year, it argued, while an influx of 200,000 new customers in the last four months – taking the total to 15.7 million – required extra investment. It also added that British Gas offered the cheapest tariff for electricity and the second cheapest tariff for dual fuel and reminded consumers that gas supplied this winter was actually bought as long as two years ago, when wholesale prices were anything up to 300% higher than they are at present. British Gas predicted that wholesale gas prices would rise to around 49p a therm next winter and to around 57p a therm the one after.
The fact remains however, that British Gas increased gas prices by 50% and electricity prices by 24% last year, before cutting them both by 10% earlier this year. In the last 12 months, wholesale energy prices have more than halved, electricity coming down from £84.95 per megawatt to £34.75 per megawatt and gas from 61p per therm to 24p per therm, as a result of the economic downturn. Alistair Buchanan, chief executive of Ofgem ("Office of Gas and Elecricity Markets"), the Government regulator, wrote to the so-called "Big Six" energy suppliers – British Gas, E.ON Energy, EDF Energy, Npower, Scottish and Southern Energy and Scottish Power – demanding an explanation of why reductions in wholesale prices were not being passed on to customers more quickly. Energy suppliers are also coming under increasing political pressure to cut their prices, with 100 MPs signing a Commons motion calling for an investigation into pricing strategies by the Competition Commission.
This may be a crumb of comfort for the 6.6 million households who currently spend 10% or more, of their income on gas and electricity and are therefore in "fuel poverty", according to the official definition. This number has actually increased by 300% in the last five years. Many consumers are being forced to seek cheaper deals by switching tariffs, perhaps available exclusively on the Internet and/or with an energy supplier away from the region in which they live, in an effort to cut costs. Indeed, increased competition amongst energy suppliers has forced prices down, to a certain extent, with the cheapest tariffs available at nearly £100 less per annum, than they were a few months ago.