Letter from the editor: Is Npower brazen or battered?

Npower's price hike has reignited a furore over fair pricing in the energy market. Ellen Bennett considers the forces at play behind what may have been a desperate manoeuvre.

Npower jumped first in the industry’s annual game of chicken this week, announcing a whopping 15 per cent price hike on electricity for customers on its standard variable tariff, and 4.8 per cent on gas. In a market fresh from a CMA investigation and still riding high on the political and media agenda, that means either breathtaking audacity or having no other choice.

Let’s be kind and assume the latter.

There’s a good chance Npower’s hedging strategies have left it exposed – good deals are all very well for keeping the prices down for a fixed term, but if market prices move consistently upwards, there will inevitably come a day of reckoning. Npower has also been under considerable financial pressure, with customer losses arising from a series of service ­failings – a glance at the 2015 supply profit figures on Ofgem’s website show the company lost £173 million on domestic ­supply, compared with the leader of the pack Centrica, which made a £574 million profit.

Npower’s 2015 set backs will have been driven by one-off restructuring costs but nevertheless, the pressure remains. The devaluation of the pound will not have helped if Npower chief Paul Coffey reports up to RWE HQ in euros rather than sterling. Add to that mounting costs for smart meters and other government programmes cited by the ­supplier, and it seems that Coffey and his team felt their hands were tied.

In truth, there is a problem with the energy market, and it’s not about one-off costs. With the prepayment meter price cap about to come into force and fixed-rate tariffs out of their hands, suppliers are left to make the bulk of their profit from the dwindling pool of disengaged SVT customers.

But good business is about more than numbers. Yes, Npower has a commitment to its parent company to meet its budget, and that company has a commitment to its shareholders to return to profit after a bruising 2015/16. But bringing the Cabinet, the regulator and the glare of public opinion back down on the industry with a headline-grabbing 15 per cent price rise for a basic and necessary commodity doesn’t do anyone any favours.

Npower has flouted public opinion and the cost to the industry, as well as its customers, will be high. It would have been better advised to follow the example of EDF and play a longer game, mitigating an 8.4 per cent rise in power prices with a fix on gas charges, as announced last December.

Will Npower be a lone outrider, singled out in the court of public opinion for inflation-busting price rises, or is it simply leading the charge? That’s up to the other suppliers now and already rumours abound of further hikes to come.