The Big 6 energy suppliers have all raised the prices of their standard variable tariffs recently. E.On kicked off with a 2.7% increase, followed by EDF Energy with 1.4%, npower with 5.3%, Scottish Power and British Gas both with 5.5%, and SSE with 6.7%. They all blamed rising wholesale prices and policy costs.
“The costs all large and medium energy suppliers are facing – particularly wholesale and policy costs which are largely outside our control – have unfortunately been on the rise for some time and we need to reflect these in our prices,” – Simon Stacey, Managing director of domestic markets at npower
In the face of price increases by large suppliers, consumer switching continues to increase with a 4% increase between March and April, in line with last year’s record number of 5.5 million electricity customers (one in six).
The figures published by Energy UK which published these figures show small and mid-tier suppliers benefiting at the expense of the larger companies:
34% were from larger to small and mid-tier suppliers
11% were from small and mid-tier to larger suppliers
Despite their success in growing market share, smaller suppliers still face a number of challenges. Several have failed in recent months, and there are calls for tighter regulation to ensure new entrants have the necessary infrastructure to cope with the customers they acquire. This week Ofgem announced that minnow Iresa had failed to meet customer service improvement targets and may face an indefinite ban on taking on new customers, increasing direct debits or asking for one-off payments until these targets are met.
Iresa now has until 27 June to make its representations in response to Ofgem’s initial findings, after which the regulator will decide whether to take further action, which could result in the company losing its supplier licence.
Ofgem is also investigating whether energy suppliers Economy Energy and E (Gas and Electricity) and consultancy Dyball Associates – have broken competition law, and has issued a “statement of objections” in which it alleges that between January and September 2016, the companies had an agreement that prevented the two suppliers actively targeting each other’s customers through face-to-face sales.
The companies shared details about their current customers, while Dyball facilitated the arrangement by designing, implementing and maintaining software systems that allowed customer lists to be shared, and recruitment of each other’s customers to be blocked.
Ofgem said its provisional view was that these arrangements prevented, restricted and distorted competition amongst energy suppliers, and would now consider any representations from the companies before deciding whether competition law has in fact been broken.
Mid-sized supplier Utility Warehouse is also being investigated by Ofgem to see whether the company has breached rules in the way it manages customers who are in debt, and in particular whether it has appropriate repayment options for indebted customers in place. It also includes whether they are installing pre-payment meters appropriately as a means of recovering debt from customers, particularly when they install them under warrant.
…while defensive consolidation among the Big 6 faces regulatory scrutiny
Last month the Competition and Markets Authority (“CMA”) opened a full-scale investigation into the proposed npower-SSE merger after previously suggesting the tie-up could lead to higher consumer energy bills.
SSE is the second largest of the big six by customer numbers, and npower is the smallest – together they would have 11.5m customers in the UK, and be almost as large as British Gas, the market leader.
The merger of the companies was announced last year, in the face of increasingly stiff competition from new challengers – there are now about 60 energy suppliers in the UK, with just over 20% market share. This is a key motivator of the proposed merger, and also one of the reasons the companies do not believe their deal threatens competition:
“There are now 60, not six, suppliers in a market in which competition is stronger than ever….this is not a case of six into five; it’s more like 60 into 59. And, as a result of this merger, one of those 59 will offer a completely new model that combines the resources of established players with the agility and innovation of an independent supplier,” – Alistair Phillips-Davies, CEO, SSE
The deal is also complicated by a proposed asset swap between E.On and RWE, owner of npower’s parent company Innogy, under which E.On would acquire a third of the merged SSE-npower entity. The Telegraph reported that Innogy is expecting the CMA to require it to divest its stake and before the Eon-RWE deal completes. It could also waive its rights to take up two seats on the board of the merged company.
The blame game
The Big 6 companies are not the only suppliers raising their prices. In March, Opus Energy wrote to its customers with news of a 7.5% price rise, which it blamed on non-energy costs including network and policy costs:
“Non-energy costs cover the cost of transporting your energy to you and provide support for Government initiatives and interventions in the energy industry, such as climate change policies”
Igloo Energy increased prices by 3.2% in April, however it blamed increases in wholesale prices, while Bulb Energy raised priced by 2.8%. First Utility, PFP Energy and ENGIE have also raised prices since the beginning of the year.
Aurora Energy Research expects household electricity prices to rise by almost third by 2025, driven by policy costs which are the fastest-growing component of bills.
The Office for Budget Responsibility calculates that environmental levies will more than double between 2016/17 and 2022/23, increasing from £5.2 billion to £12.8 billion. This does not include the £11 billion cost of the smart meter programme.
The Government on the other hand highlights the reduction in demand resulting from energy efficiency schemes:
“The Government has put in place policies that have reduced energy bills for households, which have more than offset supporting our move to a low-carbon economy. We are driving £6 billion into making homes more energy efficient over the next ten years,” – BEIS
The Government places the blame for price rises on supplier greed, saying in relation to the increase by British Gas:
“We are disappointed by British Gas’s announcement of an unjustified price rise in its default tariff when customers are already paying more than they need to. This is why Government is introducing a new price cap by this winter to guarantee that consumers are protected from poor value tariffs and further bring down the £1.4 billion a year consumers have been overpaying the Big 6. Switching suppliers will always help consumers get the best deal, saving £308 by switching from a default tariff offered by the Big 6,” – Claire Perry, minister for energy and clean growth
I have illustrated previously that the £1.4 billion of excess profits identified by the Competition and Markets Authority is inconsistent with the companies’ Consolidated Segmental Statements, and the only way in which the claim could be true would be if vertically integrated operators were recording profits in non-domestic segments including generation that were in fact earned from domestic end users (or the figures are completely wrong/distorted in other ways). Given the Consolidated Segmental Statements are prepared by the companies and audited by their auditors based on guidelines prepared by Ofgem, if they are inaccurate to such a degree, there are wider regulatory and supervisory failures taking place.
However, in light of the growing impact of policy costs on bills, Aurora Energy Research has warned that Ofgem will have “little choice” but to repeatedly raise price caps in future, undermining their effectiveness in the public eye.
Time for a change
In March, the UK Energy Research Council (“UKERC”) called on the Government to recover policy costs through general taxation rather than household bills, on the basis that energy bills represent a much higher proportion of household income for low-income households – the poorest 10% of households spend 10% of their income on energy bills while for the richest 10% the figure is only 3%.
The report accepts that some policies funded though bills have helped reduce costs for consumers by lowering demand through increased energy efficiency, but points out that more than three-quarters of policy costs relate to low-carbon subsidies (the Renewables Obligation, Contracts for Difference and Feed-in Tariff schemes)
According to the UKERC, funding energy policies through general taxation would reduce costs for 70% of households – the poorest would pay nothing, saving them £102 a year, while the richest would pay an additional £410.
“Our work shows that once you consider the hidden energy in the manufacture of all the goods and services we buy, it is only fair that richer homes contribute more to energy policy costs. Low income households, who experience fuel poverty, could be exempt from these additional charges if we rethink how low carbon energy schemes are funded,” – Anne Owen, UKERC researcher
The Government should take note of this research – recovering energy policy costs through general taxation would not only be fairer for consumers, it would also remove a big driver of energy price rises. The Government should also explore ways in which wholesale prices can become more cost-reflective, so that flexibility is valued more appropriately.
By doing so, bills would be better aligned with actual controllable costs, and energy suppliers would not find themselves trying to differentiate on prices that are largely out of their control. Capping retail energy prices is not the answer.