The shocking truth about energy prices

Published by Jenny Little on 01 August 2011.
Last updated on 06 January 2012

Electricity danger sign

They are even less trusted than estate agents, according to a government study in 2008: energy providers are the companies we most love to hate.

And with gas and electricity bills soaring and the firms' excuses for price hikes wearing increasingly thin, their reputation looks set to go from bad to worse.

Most of us have faced huge rises in our energy spending over the past four years. Last winter, all of the 'Big Six' power companies raised their prices between 2% and 9%. If you factor in forthcoming price increases, the average dual fuel bill will have risen by 50% since 2007.

It's not surprising that consumers are asking whether the reasons they're given for price increases really add up. Are we being told the truth by prospective suppliers when we shop around for a better deal? And are smaller operators any better than their mammoth rivals?

E.on's prices went up on 13 September by 11.4% for electricity and 18.1% more for gas. Scottish and Southern Energy customers will pay 11% more for their electricity and 18% more for gas.

NPower have introduced its 7.2% and 15.7% increases for electricity and gas respectively.

British Gas and Scottish Power both introduced higher prices in August and EDF Energy were the last of the 'Big Six' to hike prices - 5.4% for electricity and 15.4% for gas - which will come into effect in November.

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Pack mentality

Richard Hall, an energy specialist for Consumer Focus, says: "When it comes to pricing behaviour, we see a pack mentality among the major energy suppliers. Price adjustments are made not to undercut competitors but to match them."

So what's the real reason for these inflated bills? It's simple, say the energy suppliers: higher wholesale prices.

"We're working hard to keep prices as low as possible for our customers, but between spring and autumn last year wholesale gas prices increased by more than 25%," says a spokesperson for British Gas. "Other costs, such as network charges and environmental obligations, also rose by 6% between February and September 2010."

Selling us short

But many consumers believe energy firms are using global events as an excuse to rip us off.

While wholesale prices have certainly increased, energy watchdog Ofgem has recently released figures suggesting there was a difference of 27% between the amount big suppliers paid for electricity last year and the amount they charged for it. For gas, the gap was 15%.

"The recent price rises are in excess of what can be justified," says Hall. "The bigger energy firms have benefited from passing on these rises to customers."

A spokesperson for Scottish Power says: "Continuing unrest in global energy markets means future prices are volatile. We understand times are difficult for many people and we've done what we can to absorb these additional costs for as long as possible."

However, the large firms continue to report bumper profits. Last year British Gas raked in £742 million, while its parent company Centrica saw its profits mushroom to £2.4 billion. Scottish Power, meanwhile, posted core profits of £1.2 billion.

Saving face

The level of public dissatisfaction with the energy industry is so great that Ofgem has been forced to talk tough.

Having investigated the gas and electricity market's complex structure and its more questionable practices, the watchdog has promised to introduce a radical overhaul. It has made a series of recommendations, in order to improve trust in the industry and open it up to greater competition. It has even threatened to involve the Competition Commission if the Big Six fail to embrace these reforms.

Ofgem wants to improve transparency so that consumers can calculate whether price increases are justified, and is calling for a vastly simplified tariff structure. "Energy tariffs are really confusing, with hundreds of different products available," agrees Scott Byrom, energy expert at moneysupermarket.com.

"Even if you hear that your provider is offering the cheapest energy prices, it's highly unlikely that you're on the best-value tariff. If you've never swapped, you're more likely to be on the most expensive energy deal, missing out on hundreds of pounds of savings."
 

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