Modest price cuts are still failing customers

As suppliers start responding to pressure to reduce their tariffs, Andrew Hallett observes that small offerings should not distract us from the fact that much bigger price drops are long overdue.

Consumers have heard endless arguments over the last few years about the link between wholesale and retail energy prices – not all of it useful. If we want to escape this back and forth over the price of winter fuel bills we should start comparing apples with apples.

For starters not everyone is on mains gas (or uses electricity for heating). One and a half million households in Britain burn heating oil to stay warm. They do not benefit from Ofgem regulation and they must spend time ringing around to obtain the best quote – assuming a sufficient number of firms are willing to deliver to their perhaps remote property in the first place. Indeed this and profiteering allegations led the then-Office of Fair Trading to investigate the heating oil market in 2011.

It all comes back to oil and gas at the wholesale level of course. Crude has been on the slide for around two years and in most markets this has had myriad benefits for consumers – witness the price of petrol on the forecourt. You can see from the rebased chart below the pass-through into heating oil (kerosene) at the retail level. According to Department for Energy and Climate Change (Decc) numbers, by November 2015 it was just 58 per cent of the January 2014 per litre price, mostly due to crude oil entering the UK costing 56% less over the same period. 

Piped gas is an altogether different matter. Unsurprisingly, wholesale gas prices (as measured by ICIS) have followed crude oil prices downwards pretty consistently. This chart uses year-ahead but the same falls are evident across all the different contract lengths. Even more pronounced than oil, in November 2015 wholesale gas was trading at just 53% of its January 2014 value. Yet those falls have not led to a significant impact on retail gas prices, again as recorded by Decc. Look at the very consistent, almost horizontal red marking retail gas prices. This puts in context the price reductions offered by energy suppliers over the last two years. Despite wholesale price falls and only limited changes in other costs, retail gas offerings are only 7per cent down on January 2014. Domestic energy consumers have so far been excluded from the benefits of the commodities slump, a slump that market signals suggest will carry on well into 2016. In this context, EON’s recent 5 per cent cut for average users is a welcome (albeit small) step back to where prices need to be – likewise SSE’s cut.

Suppliers point out the theoretical availability of very much cheaper fixed deals obtained via online search efforts by (some) consumers. But 70 per cent of consumers, disproportionately on lower incomes, sit on more expensive variable deals. Rather than passing on the proceeds of cheaper gas solely to the active switchers on fixed term deals, suppliers should make the long-overdue adjustment to their variable tariffs, passing through the savings they have been banking for the past two years.

It is because of the difficulty of engaging vulnerable consumers that Citizens Advice has  proposed a targeted “backstop tariff” as part of our submissions to the Competition and Markets Authority energy market investigation. In this reform those in a defined and broadly vulnerable group would be automatically charged their supplier’s cheapest tariff price (which right now would be a fixed deal). This would effectively remove these “sticky” consumers from the competitive market and maximise their interests in a more direct way than anything does now. It also de facto transfers back the hedging and other risks onto the more powerful party, the supplier, rather than demanding consumers make difficult predictions about future price movements.

We also play a big part (through activities and events like Big Energy Saving Week) in encouraging potentially more engaged consumers to switch to get better deals. Energy Best Deal, run by ourselves with Ofgem and large supplier support, is aimed at low income consumers who have not switched before. Our front-line staff work with people at risk of fuel poverty who can be signposted to a range of further help with issues such as fuel debt, benefits entitlement and energy efficiency.

Generally, we recognise in aggregate the benefits of market innovation and competition in delivering comparatively cheap energy. What is more troubling is that the essential service, this homogeneous good, is being priced to different people at unacceptable differentials.

Suppliers’ arguments are no longer defensible. Competition at the fringes is not a substitute for savings for all consumers. The contrast between the falls in commodity costs and the tiny drops in retail prices is clear evidence that suppliers are failing their customers. Regardless of any medium-term reforms, the immediate price issue comes down to energy suppliers not passing on the wholesale price falls they have enjoyed for months onto the bulk of their customers. We join the Prime Minister and Ofgem in saying there needs to be significant price cuts, now, for all customers.