Energy bill cuts ‘were possible’

Published: Tuesday 3rd February 2015 by The News Editor

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Energy bills could have been slashed further and sooner than the recent flurry of cuts, new research claims.

Which? said its analysis showed that a failure to align retail prices with wholesale costs has cost consumers up to £2.9 billion over the last year – or the equivalent of £145 per household on standard energy tariffs.

The consumer group compared costs to suppliers of buying wholesale energy since 2013 to the prices paid by consumers through energy bills in the same period.

It said the research suggests standard variable energy tariffs have not kept in line with wholesale prices over the last two years.

Which? claimed it could find “no justification” to increases in gas and electricity prices in late 2013, based on wholesale costs.

It said the recent cuts of up to 5.1% in standard gas tariffs by Big Six suppliers should have been higher. If they were aligned with wholesale energy costs the cuts should have been in the region of 8.8% to 10.3%, equivalent to a decrease of between £777 million and £907 million a year to households on standard gas tariffs, the report claimed.

It also said suppliers could reduce electricity prices by up to 10%.

Which? executive director Richard Lloyd said: “Our analysis places a massive question mark over how suppliers have been setting prices over the last two years. They now need to explain to their customers why bills don’t fall further in response to dropping wholesale prices.

“Energy bills are consistently the top consumer concern so it’s about time people got a fair deal.

“While the competition inquiry should establish beyond doubt whether the price people are paying today is right, consumers will now look to politicians of every party to set out how they’ll deliver fair and affordable energy prices in the future.”

Which? said the research involved looking at commonly used buying or hedging models reflecting the range of approaches “most likely” to have been used by suppliers to estimate the cost of buying wholesale energy since 2013.

These costs were analysed against an estimate of what consumers have paid for wholesale costs through energy bills in the same period.

Lawrence Slade, chief executive of Energy UK, the trade association for the energy industry, said: “Customer deals are falling in price – over £100 cheaper than this time last year.

“The Which? calculations are based on very many assumptions and do not reflect the cheaper deals we are seeing.

“Which? points out that each company allocates their costs differently and this makes it difficult to estimate wholesale costs and hedging strategies.

“Indeed its hedging assumptions for 2013 are different from Ofgem’s report based on the companies’ actual accounts.

“Costs are coming down but, because energy companies buy ahead to fix prices and to plan with certainty, the gas and electricity we are using today has already been paid for.”

Energy regulator Ofgem said it welcomes Which?’s contribution to the debate on energy prices.

A spokesman added: “We have consistently called for suppliers to explain the growing gap between wholesale prices and retail prices.

“Which?’s report echoes Ofgem’s concerns that bills go up faster in response rising wholesale prices than they fall when wholesale prices come down, which was one of the reasons for our referral of the market to the Competition and Markets Authority.”

Published: Tuesday 3rd February 2015 by The News Editor

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