Thirty years ago, the supply and distribution of UK electricity was privatised, three years’ after the same had happened to gas services.
Since then, with considerable restructuring and consolidation, the dominant energy companies – the ‘big six’: Centrica plc (British Gas), EDF Energy, E.ON, SSE, Scottish Power and Npower – now all supply gas as well as electricity. Further, they have merged power generation, distribution networks and the supply businesses of the original companies. This has enabled them to play fast and loose with customers as well as with the regulator OFGEM.
These companies were always quick to raise prices when global prices rose and slow to reflect any falls in wholesale prices. Whatever the justifications – hedging, long-term averaging, other factors – the directors and shareholders always seem to have done well. Significantly, this has been because of an understandable reluctance to switch by domestic customers. Conservative ministers and liberal economic commentators have actually blamed these customers – mainly the oldest and poorest without internet access – for their own predicaments of paying much more for energy simply because they didn’t switch. There’s capitalism for you! Perhaps most people just want to be fairly treated rather than exploited.
Between 2000 and 2008 energy prices rose steadily. After 2008, prices continued to rise but fluctuated and the real terms rate of increase has been lower. From the end of 2016, energy prices have been rising. There are many reasons for this, but the 25% fall in the value of the £ since the EU referendum is significant. The suppliers had hedged the £ to reduce the fluctuations in the short-term, but this underlying cause will inevitably mean higher energy costs in the future.
The wholesale costs of energy have been the single biggest element of any energy bill, but they have fallen from more than 50% of the bill a decade ago to just 36% of the bill today.
As the mix of energy sources has changed – the emergence of wind, solar power etc – new suppliers have entered the market and the big six’s market share has declined from 95% of the domestic energy market in 2012 to 73% today. Inevitably, the number of suppliers has fallen from last year’s peak of 73, with several going bust, being under-capitalised for this market and raising serious questions about OFGEM’s appraisals.
In 2016, the Competition and Markets Authority published the report of its lengthy inquiry into the dysfunctional energy market. It found that
- about 70% of the domestic customers of the ‘big six’ are still on an expensive ‘default’ standard variable tariffs (SVT)
- these customers could potentially save over £300 by switching to a cheaper deal
- customers could have been paying about £1.4 billion a year more than they would in a fully competitive market.
Price rises for some customers are now limited by the tariff caps which the government, despite its instincts, was forced to introduce. However, to access many of the lower tariffs, customers are required to have a smart meter. But, the current range of smart meters are simply not inter-changeable between suppliers. So, in many cases, if you change supplier, you are also required to have a change of smart meter. “It won’t cost you anything” say the suppliers. I say “Well, who the heck is paying for these second-rate meters? It certainly isn’t the shareholders or directors or even the companies; of course, it’s the customers.” The government’s financial incentive regime and the suppliers’ insistence on smart meters should be halted until they’ve got this sorted out.
In 2017, an independent review – led by Professor Dieter Helm – made a number of suggestions to restructure the energy market and to reduce non-wholesale costs for domestic consumers. Last November, the then Energy Minister promised that a detailed White Paper would follow in 2019. Like most Conservative promises – on adult social care, on housing, on local government finance – we’re still waiting for the realisation.
This month, Ofgem announced that the levels of both the prepayment meter and the default tariff caps would decrease. Ofgem expect these changes to impact around 15 million customers.
August 9th’s electricity blackout demonstrated that the government has been forcing the National Grid to take even bigger risks with our energy supplies. Today, it has been revealed that the National Grid is routinely restricting the use of its own power cables from the Continent because of the risk of further blackouts if they failed. It appears that there is every prospect of the lights going out more often. Are you prepared?
What might you be able to do to get a lower energy bill?
Get some neutral advice from Citizens Advice (CAB) at
Find out if you are entitled to help with your energy bills. See Help with energy bills from the House of Commons Library:
And, if you don’t have internet access, get a family member of friend who does to help you.