British Gas: the lone wolf of price cuts

British Gas, the UK’s largest energy supplier, broke ranks this summer, announcing a five per cent cut in gas prices, in response to new energy secretary Amber Rudd’s call for lower bills. Its announcement came just weeks after the Competition and Markets Authority accused suppliers of overcharging customers by just that amount. Other suppliers faced pressure from all sides to follow suit – but so far, none has done so.

In cutting its gas price, British Gas is passing on falls in the wholesale cost. It would argue that it is being generous in doing so, because thanks to complicated hedging strategies, it takes a while for price falls to hit the supplier’s own bottom line. This argument, however, bears little weight with politicians and members of the public anxious to see lower bills. Other suppliers are reluctant to pass on the wholesale savings, saying simply that they will wait and see. As for electricity – with environmental levies and other costs rising, not even British Gas will heed calls for a price cut.

British Gas put gas bills down by five per cent, lowering the average tariff by £32. It said: “This reduction reflects our lower projected total costs for 2015 and 2016. Wholesale prices have been stable through 2015, so today’s changes largely reflect earlier falls in 2014. Like all energy suppliers, we buy our gas gradually and in advance – so it does take time for any changes in the wholesale market to feed through into customer prices.”

Consumer bodies welcomed the “bold” if overdue move, suggesting it would spark a price war between the big six suppliers and ensure lower prices for all customers. A flurry of further announcements was expected, but so far, none has emerged.

Other big six suppliers are currently sticking to the well toed line that gas prices will continue to be “monitored”, although SSE acknowledged that “cuts from any supplier is good for competition,” but said it already had “some great deals in the market”. It has left the door open for a future price cut, saying “If we can cut them again, we will.”

Only Scottish Power has indicated that a gas price cut “is likely” before the winter, dropping the hint on BBC Radio 4’s Today programme. At the moment at least, British Gas is a lone wolf. But Lazarus analyst Edmund Reid does expect more to come before the year is out. After all, if one supplier can pass on the savings, even louder questions will be asked of the others that have yet to.

There is little hope of widespread cuts on power prices. Even British Gas, so keen to be seen as the consumer’s friend, has stopped short of cutting electricity prices, pleading that “while electricity wholesale prices are lower, other costs we face for electricity have continued to rise.”

By other costs, it means the electricity suppliers’ greatest bugbear, the additional charges levied on bills by government – or the “green crap”, as prime minister David Cameron memorably described it in the last parliament. This refers to environmental levies, subsidies for renewable energy, and the additional costs for transmission and distribution, which are charged through the supplier’s bill. All of these costs are rising – a crucial fact which, suppliers claim, leaves them unable to cut bills.

Jeffries’ analyst Peter Atherton explains that “green levies and network costs are rising, and fall overwhelmingly on the electricity bill.” British Gas said costs for transmission and distribution, metering, feed in tariffs and levies for renewable subsidies are forecast to rise by 4 per cent this year. It is keen to point out that despite these rises, it has not increased electricity prices since 2013.

It’s not all bad news for consumers: Reid says the combined effect is a steady price, saying “the increase in other costs thus largely negates the fall in wholesale electricity costs.” The end result is while the cost percentages are moving, customers are not seeing any rend change.

Still, SSE argues that energy suppliers should not be lumbered with all these rising costs which prevent cuts to electricity bills. A spokesperson for the supplier said that SSE “believes government levies should be taken off bills and placed into general taxation, cutting bills and making the levies fairer.” It has also argued for a reassessment of the smart meter rollout to prevent an increase in the cost, and a change to the way transmission charges are distributed.

This might seem like a long list of demands, but it appears the government is willing to listen.

Amber Rudd last week announced a £500 million withdrawal of support for biomass, and an additional undisclosed sum for small scale solar following the revelation that the Department for Energy and Climate Change overspent on the Levy Control Framework by £1.5 billion, an overspend that will be footed by customers through energy bills. Rudd has already cut support for onshore wind through the Renewables Obligation a year earlier than planned as part of a push for cheaper energy for consumers.

The government is putting its money where its mouth is. With winter just months away, some might say that energy suppliers are running out of excuses.