The energy regulator has launched an investigation into whether the UK energy market is “working effectively” - just hours after British Gas announced a 500% increase in profits.
The vast majority of UK consumers have been hit with double digit increases to their energy bills in recent weeks, which could push many into fuel poverty. Energy suppliers say they are merely passing on high wholesale costs, but the fact those claims have come as they are posting soaring profit margins has led to allegations of collusion and price fixing in the UK energy market.
“It is perfectly true that there is volatility in wholesale energy markets… but it seems equally true that such volatility hits consumers and not shareholders. Consumers will feel justified in claiming that they are being taken for a very rough ride by energy companies,” says Adam Scorer, campaigns director at consumer watchdog Energywatch.
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So what will Ofgem investigate?
The regulator will now take a “detailed” look at the competitiveness of suppliers’ pricing and their respective market shares, as well as the relationship between retail and wholesale energy prices, says Ofgem chief executive Alistair Buchanan.
“We shall replace our magnifying glass with a microscope and take a more detailed look at the retail market and the influence of global wholesale market developments.” The investigation will be carried out under Ofgem’s Enterprise Act powers, which will give the regulator access to detailed information not routinely made available.
Other areas to be covered in the probe include:
- The customer’s perspective and experience of the market including access to information and barriers to switching supplier
- Switching rates for different groups of customers (such as online, dual fuel, single fuel and pre-payment)
- Customer movement between payment types as well as suppliers
- The economics of new entry and the experience of companies trying to enter the energy market
But even though it is undertaking this thorough investigation, Ofgem is at pains to stress it has “no strong evidence” of failure in the market, and is only doing so in response to growing public concern over energy prices.
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Price and competition are key
One area of the investigation that could prove critical is that of pricing. As Buchanan says, the regulator will be looking at “whether the market is working well for all energy customers - and not just particular groups, such as those who are on the cheapest online deals”.
Given that there is currently a £293 difference between E.On’s standard and online tariffs, and that prepayment energy customers – who are most likely to be on low incomes – are paying on average £195 more for than the standard rate (according to Energywatch), it’s patently clear that the market is not “working well” for everyone at present.
Remember that we are talking about the supply of gas and electricity, where the amount it costs a company to supply one household is exactly the same as it costs to supply their neighbour. The fact that one could be paying nearly 30% more than the other will no doubt prove one of the central points in Ofgem’s investigation.
It will be interesting to hear the regulator’s findings, which will be announced before end September.
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What can you do?
With energy prices soaring, your two options are to use less of it or switch to a cheaper deal. If you are looking to change suppliers, proceed carefully: Scottish & Southern Energy (SSE) is currently the cheapest supplier by a fair margin, but this is only because it has yet to hike its prices this year.
When it finally does so - expected around March 30 - there’s no guarantee you’ll still be on the best deal, so it might be worth holding off until then. Alternately, you could just switch again should it become necessary – it is free, after all.
Another important element of switching is to always choose the online deal, as simply switching between standard tariffs is unlikely to save you much money. This is because suppliers tend to set their tariffs at similar rates to their competitors - there is only a £90 difference between the cheapest and most expensive standard tariffs (excluding SSE). So even if you were to move from the most expensive deal to the cheapest, you will only save £7.50 a month.
However, opt for the online tariff and you could save anywhere up to £300 on your annual bills.
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