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Rising energy prices are a worry for households across the UK. Since 2007 average prices of gas and electricity have risen by 41% and 20% in the UK in real terms, according to DECC. This has had an adverse impact on fuel poor households and thrown Government targets to eliminate the problem by 2016 off-course.
The main driver behind energy price rises has been wholesale gas and electricity costs, but network charges, energy and climate change policies, and company costs and profits also contribute. In future, DECC estimates that its energy and climate change policies will add 33% to the average electricity price paid by UK households in 2020, in addition to any potential wholesale price rises. The Department maintains, however, that household bills will be lower than they would otherwise be in the absence of policies.
The six largest energy companies argue that the majority of these costs behind price rises are outside their control. However, these energy companies are complex with several different arms performing different roles - generating, trading and supplying energy. The complex vertically-integrated structure of these firms makes it difficult to determine where profits and losses are being made within them and how they might relate to recent energy price rises.
Despite huge turnovers, and in some cases large profits, the six largest energy companies have made significantly different levels of profit and loss between the supply and generation parts of their business. The actual level of profit in, for example, the energy supply arm is therefore difficult to establish. Greater transparency is urgently needed to reassure consumers that high energy prices are not fuelling excessive profits.
One thing is clear; energy companies have been poor at communicating with their customers. Confusing bills, complex tariffs and a lack of transparency around profit margins have fuelled deep mistrust among consumers. Some energy companies deserve praise for the recent improvements they have made to simplify bills, but we remain concerned that efforts are falling far short of what is required to improve transparency, increase competition and enhance consumer trust. It is disappointing, for instance, that the big energy companies have not gone to greater lengths to explain the reasons behind price rises. Regulatory intervention is now needed to deliver meaningful change.
Ofgem is failing consumers by not taking all possible steps to improve transparency and openness in the energy market. That the regulator has not taken up accountancy firm BDO's recommendations to improve energy company reporting or listened to criticism over Supply Market Indicators is astonishing and lays it open to criticism that it is unwilling to use the teeth it has. Considering consumers' lack of confidence in energy companies, Ofgem should consider whether the transparency to be gained by implementing BDO's recommendations outweighs the costs involved.
Increasing transparency and simplifying bills would help to improve the currently low level of competition. Increased competition is one of the best ways to ensure customers were paying a fair price for their energy. Ofgem has the power to make the changes necessary to improve competition through the licensing conditions it sets for companies. If it fails to act, the Government must stand ready to use any new statutory powers it has under the forthcoming Energy Act to compel greater transparency from energy companies.
The Government must not forget that rising prices are exacerbating fuel poverty.
Energy is becoming increasingly unaffordable for low-income families living in poorly insulated and inefficient homes. Yet just as the situation for the most vulnerable is worsening, it appears that fuel poverty policy has effectively been frozen. Spending on the problem has been cut in England and some of the Government's fuel poverty programmes appear to be in hiatus. The use of levies on bills to fund social and environmental programmes will add to the burden faced by energy bill payers, particularly in low-income households. Public spending is less regressive than levies in this respect. If Government is to continue raising levies in this way, it must ensure that the public understands the different components of an energy bill and how these relate to policy costs.
Ministers have been unacceptably slow to respond to the Hills Review and take action to stem the problem. It is imperative that the Government's new fuel poverty strategy, expected at the end of this year, is not delayed any further. It should be published and implemented as an urgent priority.
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