5 Conclusion |
148. In chapter two we concluded that wholesale costs
can be expected to continue to rise in the short to medium term
driven by the rising price of gas. We identified that customers'
bills are made up of a variety of different components. Most of
these constitute costs (the wholesale price of energy and operating
costs), including the cost of implementing energy and climate
change policies, which energy companies pass through to customers.
Profits also form part of energy bills but, as we discussed in
chapter three, the six largest energy companies in the UK are
very complex with several different arms to their business. When
reporting their overall profits they include all these different
business arms. This makes it difficult to determine the profits
of the energy supply companies and see how this impacts upon energy
prices. It has not been possible for us to determine with certainty
the level of energy company profit margins. We therefore call
for more transparency and more robust data to enable an accurate
assessment of profitability to be made.
149. Attempts to improve clarity over energy company
profits have proved challenging. Both Ofgem's Consolidated Segmental
Statements and Supply Market Indicators have worked to muddy the
waters. That a forensic accountant was required to help Ofgem
understand the statements is illustrative of the complexity in
determining profits. The average consumer has little hope. That
Ofgem has not taken up BDO's recommendations or listened to criticism
over SMIs is astonishing and lays it open to criticism that is
unwilling to use the teeth it has. It is time for Ofgem to take
decisive action to improve transparency and competitiveness in
the retail and wholesale markets taking full advantage of both
EU and UK legislative powers.
150. The trend of rising prices that we have noted
will exacerbate fuel poverty. It is disappointing that Government
has not been quicker to respond to the Hills review to set out
the full implications for policy of a new definition of fuel poverty.
In the meantime the situation for the most vulnerable worsens
while some fuel poverty policy programmes are in a state of hiatus.
At the same time there is a reduction in the money available for
fuel poverty, and a shift, in England at least, away from public
spending towards levies - adding further burdens on consumer bills.
151. We have noted that tax-funded public spending
is a less regressive mechanism than levies, and that the impact
of levies on the bills of the fuel poor is perverse when they
will derive no direct benefit. Shifting the emphasis from levies
to taxation would help protect vulnerable households. There is
no widespread understanding by consumers of how much of their
bills are made up of levies. As we noted in our Consumer Engagement
report inconsistent and, in some case, inaccurate media reporting
serves to further undermine public trust in energy suppliers.
We have called for an honest conversation about the fact that
energy bills are highly likely to continue to rise. Government
also needs to be in the lead in ensuring that consumers understand
its decision to fund policy in this way, and of what the breakdown
of these costs within bills are. This can only enhance transparency.
152. We strongly believe that the gains in transparency
and associated public confidence and trust far outweigh the cost
of reform. It is clearly in everyone's interest including the
energy companies to improve understanding of energy companies
profits. It will be difficult to deliver the reform our energy
system, increasing efficiency, reducing demand, investing in infrastructure,
whilst meeting our statutory obligations to carbon and fuel poverty
reduction, without the support of consumers. The affordability
of energy is a matter of great concern to most consumers, not
just those that are technically fuel poor. Governments, the regulator
and energy companies need to do more to promote accurate understanding
of energy prices.