Wholesale costs and mega profits: Why do UK energy prices keep on rising?

posted on 30/10/2013 09:35:51 by Dan O'Sullivan

We look at some of the reasons that could explain why energy prices have continued to rise in recent years

Plugging into the market is essentail to understanding energy bills

"The wholesale cost of gas and electricity is increasing, so companies have no choice but to pass this onto consumers."

Sound familiar? This is an explanation that all the major suppliers have offered to justify rising energy bills - and it's become almost as predictable as the price hikes themselves. Year after year rates go up, and year after year the Big Six say it's because of factors beyond their control.

Yet despite the claims, new data released by Ofgem has indicated that wholesale energy costs have only increased by 1.7% in the past 12 months - far less than the average 9.1% jump that people are set to see in their energy bills. The regulator isn't alone in making this suggestion, as Ovo Energy managing director Stephen Fitzpatrick recently revealed that he hasn't noticed any substantial changes in wholesale prices.

With the Big Six enjoying combined profits of £3.7 billion and people struggling to pay their bills, such news is sure to spark further outrage: if it isn't the cost of acquiring energy that's to blame for the annual introduction of higher variable rates, then is the motive just shameless profiteering?

Big Six fight back

According to British Gas, around £112 of the average household bill is used by suppliers to pay for environmental and social costs imposed by the government.

Unsurprisingly the major suppliers have contested the claims, arguing that Ofgem's method of determining wholesale costs is flawed.

In short, the rebuttal is that the process isn't a simple case of energy companies buying gas and electricity at a set rate and selling it to consumers in a similar fashion. Instead, different purchasing decisions are made based on various long-term projections that are dependent on customers' needs.

Given that the regulator does not have access to the finer details of the techniques the Big Six use to buy energy, maybe the suppliers have a point - but couldn't they be more transparent about their wholesale strategies? Wouldn't this help regain the public's trust?

Environmental obligations

While we wait to see if energy companies are more forthcoming with the intricacies of wholesale pricing trends, there are other places to look to explain rising bills - specifically green levies, which have been the subject of much debate among politicians.

According to British Gas, around £112 of the average household bill is used by suppliers to pay for environmental and social costs imposed by the government.

Removing these costs could undoubtedly lower bills in the short term, but the long-term impact is uncertain - especially since levies are designed to pay for technology that will keep energy prices down in the future.

Either way, SSE managing director Will Morris has called on the government to pay for these costs through general taxation, insisting that such a move would immediately result in cheaper bills.

Reluctance to switch

Whatever way you view the explanations for rising energy prices, it's vital to remember that switching supplier is consistently touted as a way to save money - yet a record number of people are not doing so.

As a result, the Big Six could be forgiven for being under the impression that they can get away with increasing their tariffs, because they know that doing so won't lead to them losing a significant number of customers.

To counter this, more switching and increased competition would make suppliers more motivated to retain customers through cheaper rates - and this could go some way towards bucking the trend of price hikes every autumn.

If that happens, perhaps we won't need to ask if claims of increased wholesale prices and governmental compliance are a mere smokescreen for inflated shareholder dividends.

Dan O'Sullivan

Dan O’Sullivan is Make It Cheaper's Web Content Manager, which means much of his time is dedicated to ensuring we have plenty of online material to help business owners understand the energy, insurance and telecoms industries. With years of experience working alongside SMEs, Dan is committed to making life as easy as possible for smaller firms. You can email Dan at dan.osullivan@makeitcheaper.com

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