Price Cut Pressure Mounts on UK Energy Firms

Posted by Joseph Keefe
Tuesday, June 10, 2014

Big six suppliers' pre-tax profit margins double in past year; Wholesale prices have dropped due to mild winter, healthy stocks. Energy price cuts could be put off due to Miliband freeze pledge.

Britain's big energy suppliers are coming under mounting pressure from consumer groups and politicians to cut household power and gas bills after a sharp drop in wholesale costs boosted the firms' profit margins.

The country's "big six" energy providers, which supply 96 percent of UK households, are being urged to tame rising energy costs, and at least one lawmaker in Prime Minister David Cameron's Conservative Party has called on the government to act swiftly to break up the energy companies.

Tapping voter discontent ahead of next May's general election, Labour leader Ed Miliband has pledged to put a 20-month freeze on household energy bills if he is elected.

Around half of the average British household energy bill is made up of underlying market prices for electricity and gas, while the rest is composed of, among other things, costs for energy transport, expenses to support vulnerable customers and support for renewable energy production.

"If wholesale prices go down by ten percent, then our bills should go down by five percent," said Ann Robinson, director of consumer policy at price comparison website uSwitch.

"It's time for the energy companies to seriously start thinking about reducing our bills."

Market prices for winter 2014 electricity and gas, when demand is typically highest, have dropped by 13 percent and 17 percent respectively since the end of 2013, due to healthy gas imports and unseasonably warm weather over the past six months.

As a result, energy regulator Ofgem estimates that the big six are poised to double their pre-tax profit margin over the next 12 months to above 7 percent from 3.4 percent a year ago.

Data published by Ofgem last week showed so-called "duel fuel" suppliers are poised to make an average profit of 96 pounds ($160) per home over the next year, compared with an estimated 44 pounds over the past 12 months.

Ofgem estimates a typical home will spend 1,346 pounds on power and gas over the next 12 months from May - a 3.1 percent year-on-year rise - despite lower wholesale prices and a 15 percent drop in "environmental and social" costs since January.

"Energy prices and profits do not add up for consumers. Companies hike prices when costs rise, so consumers expect them to come down when wholesale costs fall sufficiently," said Gillian Guy, head of consumer group and charity Citizens Advice.

None of Britain's big six suppliers - SSE, EDF Energy, Scottish Power, E.ON, RWE npower and Centrica's British Gas - has passed on any recent savings from lower wholesale prices to customers.

In response to questions, the firms all declined to confirm whether they would cut tariffs or why they had not already, saying only that they were constantly monitoring the market.

"We keep a close eye on all the costs that go into supplying energy - not just the wholesale cost, which accounts for one half of the bill - and if we can lower prices, we will," said a spokesman for SSE.

Meanwhile, small energy suppliers, which typically have more flexible pricing due to lower running costs, have seized on the opportunity and cut bills to reflect the lower wholesale prices.

Last month, a record 50 percent of customers who chose to part ways with a major supplier signed up with a smaller one, data from energy sector trade group EnergyUK showed.

"We believe that it's only right that these savings are passed onto customers to help lower their energy bills," said small supplier First Utility's Chief Customer Officer Ed Kamm.


But energy experts argue that wholesale prices have to remain low for an extended period of time to reflect in the big suppliers' pricing methods, which are more long-term focused.

"Companies will wait until autumn to assess the situation: what is the price in the portfolio of client contracts, what have they hedged at what price and where are market prices?" said Roland Vetter, managing director at investment advisory firm CF Partners.

Others predict suppliers, fearing market intervention if the opposition Labour Party wins next year's election, will put off cutting prices for as long as possible.

"The big six are worried about cutting prices now and then having to increase them later to protect themselves should they be faced with the Miliband freeze," said uSwitch's Robinson.

Calls made by Reuters seeking comment from Labour's Shadow Energy and Climate Change Team were not returned.

Britain's Department for Energy and Climate Change said it was aware of the recent fall in wholesale prices but that it would not dictate price levels.

In March, Ofgem called on Britain's Competition and Markets Authority to investigate the industry after finding competition in the energy market was not working as well as it could. ($1 = 0.5956 British Pounds)

By Michael Szabo and Karolin Schaps

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