The claim
“I’ve been worried by this phenomenon called ‘going up like a rocket and down like a feather’ – when energy prices seem to go up very quickly but then don’t fall”
Energy secretary Chris Huhne MP, 11 January 2011
The background
All hail EDF, the first of the big six energy companies to cut its gas prices in response to falling wholesale prices.
Well, the move was well “overdue”, said the watchdog Consumer Focus, as it pinged round a rather damning graph pitting wholesale gas prices against retail prices.
Of course there’s a gap between the two lines on the graph – the energy companies have got to make a profit.
But Chris Huhne is worried that the two lines aren’t running in tandem enough – that energy groups are too quick to put up retail prices when wholesale prices rise, but too slow to drop prices for hard-pressed consumers when wholesale prices drop.
Are his concerns well founded? FactCheck investigates.
The analysis
Ofgem has tried to wade into the debate on the consumers’ behalf, issuing a report helpfully called: Do energy bills respond faster to rising costs than falling costs? The energy regulator claimed that it had found “some” evidence that showed this was the case, but overall concluded that “the implication for consumer harm is not clear cut”.
The reason it’s not clear cut is that we’re not quite sure how much energy companies pay for their gas, so we don’t know if they’re being fair or not.
Companies will buy their gas in advance (hedging), and they’ll spin lots of deals at once – buying some gas three years in advance, and some gas three months in advance say. We therefore have no real way of knowing exactly how much they’ve paid for it overall.
Energy prices are volatile, and as Ofgem points out: “Wholesale prices on any given day are therefore not a good indicator of suppliers’ wholesale costs, nor are short term products such as within-day or day-ahead products.”
So when EDF said today that it is cutting its prices because wholesale gas prices are down by 9.2 per cent – it actually doesn’t mean EDF has paid 9.2 per cent less for the gas it is supplying its customers with.
What it really means is that 9.2 per cent is the average of all the deals across the market, a spokesman told FactCheck, for gas that they are currently buying to supply this summer.
As the deputy editor of the oil and gas trade journal ICIS Heren, Tom Marzec-Manser told us: “Without looking at their pricing model it’s impossible to know”.
So comparing current or even historical wholesale prices with retail prices, as Consumer Focus has, is not entirely fair on the energy companies. There are lots of big unknowns when buying for the future – who knew for example, that prices in 2011 would be hit by the nuclear disaster at Fukushima or the Arab Spring.
That said, it’s not entirely unfair to make the comparison – as global tremors will be factored into the price, to a certain extent.
The verdict
We can take a look at wholesale gas prices and see that the average price has dropped – but how much money EDF has saved from this, we can’t tell. And as for passing on that price drop, we can’t be sure if they’ve cut their customers a good deal.
So the key question for the customer then should be: are they offering me a good deal compared with the other suppliers?
As the industry is privatised, the government can only help up to a point. Chris Huhne said it is trying to coax more competition onto the market – by encouraging smaller companies to get involved. Smaller group Ovo Energy proved this works last week, when it was the first to cut its bills by 5 per cent.
The government also claims it has “strengthened the consumers’ hand” by cutting the time it takes to switch providers and forcing energy companies to warn consumers when price changes are on the horizon.
We should all be worried about energy prices, but the only answer is to vote with our feet. It’s the same rule for utility bills as it is for any bill – your mobile phone or weekly shop – if you think you’re spending too much, shop elsewhere.
By Emma Thelwell
