Energy Prices, Profits and Poverty - Energy and Climate Change Contents

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.

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Prepared 29 July 2013