Just why haven't energy bills fallen?

26 November 2008

The government and Ofgem, the electricity and gas regulator, have pledged to continue to put pressure on energy providers to cut their prices and pass on the benefits of cheaper crude oil to their customers.

Alistair Buchanan, chief executive of Ofgem, recently told MPs that it is "putting as much pressure" as it can on gas and electricity suppliers to pass price cuts on. The regulator itself is also under pressure to ensure energy bills come down, having been urged by the chancellor Alistair Darling to monitor more closely movements in wholesale and retail energy prices.

There are mounting concerns that despite crude oil having peaked in August, households and businesses are still not benefiting. Gas and electricity tariffs increased by as much as 50% in the first half of 2008 while crude oil costs were mounting. But now that these wholesale costs have started to fall back, cuts are still not forthcoming.

The government has even become involved, and recently highlighted the insufficient moves by the big six energy suppliers in Britain to pass on price cuts to their customers. Darling has now told Ofgem to monitor changes in gas and electricity prices, and publish reports on a quarterly basis to uncover whether any drops in wholesale prices have been passed on quickly.

Some energy companies have suggested that customers could see the benefits of falling wholesale prices in the new year, but Ofgem and other consumer bodies feel the delay between any drop in wholesale prices and this being passed onto customers is too long.

Energy companies have defended these delays by saying that they protect consumers from acute changes in prices. But the government has said it is unacceptable that consumers can wait up to several months for changes in wholesale prices to filter through to their own bills.

Concern has also risen over the disparity between the costs of different payment methods. Pre-payment meters tend to be more expensive than quarterly billing, but with poorer households more likely to have pre-payment meters, consumers of British Gas, for instance, are paying an average of £33 more than customers who pay their bills on a quarterly basis.

Suppliers have defended this gap in cost by saying that pre-payment meters are more expensive to maintain, but an Ofgem enquiry found that some pre-payment customers were paying more than the maintenance costs justified.

Joe Malinowski, founder of energy price comparison website TheEnergyShop.com, believes prices should fall by as much as £200 in 2009.

“The further wholesale energy markets fall, the bigger the scope for cuts in retail energy bills," he explains. "Based on current forward wholesale prices we calculate that cuts in energy bills could now be in the region of £200 over the next 12 months.”

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