Posted by: Paul | November 26, 2010

Energetically Profiteering?

News was announced today that OFGEM, the energy market regulator, is to open an investigation into why the ‘big six’ UK gas and electricity providers have announced such large profit margins – up to 40% in some cases – while at the same time hiking consumer prices citing ‘significant rise in wholesale energy prices’. We all know that our energy costs are on the increase – it’s hardly been out of the headlines in the past few weeks – but the question is, is it fair and is it necessary?

The main accusation levelled at the energy companies is that they’re quick to raise prices when the wholesale price goes up, but when it drops they then do not pass on those savings to customers in the same way. Listening to You & Yours on Radio 4 on the subject in the days after the first price rise was announced by British Gas, the defence offered was that supplies are purchased in advance on long term contracts so when prices drop, they’ve already purchased at the higher price and so are ‘locked in’ and unable to lower it without making a loss. But flip that coin – why then when prices go up does the same rule not apply and the rise is mitigated by the fact the supplies have indeed been purchased in advance? They can have it one way, but not both.

One thing no-one has picked up on in the coverage (unless I’ve missed it) and has not been explained anywhere, is why the disparity of the rises between companies? I know everyone operates under slightly different procedures and each company has different costs, but when you analyse the rises announced so far next to each other you can see the differences:

British Gas – 7% rise, GAS AND ELECTRICITY
Scottish and Southern – 9.4%, GAS ONLY
Scottish Power – 8.9% ELECTRICITY, 2% GAS

If you take British Gas as the benchmark here having been the first to announce, why don’t S&S feel the need to put their electricity price up at all? And if the cost of gas has gone up so much, then why is Scottish Power able to consider a rise of just 2%?

Something fishy is going on here. If there’s a simple explanation I’m missing I’d be very grateful if someone out there can enlighten me.

With Npower and EON yet to declare their strategies and EDF announcing a price freeze until the spring, they at the moment probably stand to gain market share as people dump their existing supplier and head for cheaper deals. And who can blame them? Cutting energy use when you’re already pretty frugal about it is hard. With the weather the way it is at the moment, it’s pay up – or freeze.

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