Are energy firms ripping off UK households?
British Gas and Scottish Power are the latest major UK energy suppliers to announce a 10% price increase, in line with new price cap level announced by Ofgem earlier this month - that's five of the Big Six who have now increased prices.
The price cap was brought in by the government to end “rip-off energy prices”, but this latest round of energy prices hikes has come just as wholesale energy prices are plummeting – so are energy firms ripping off UK households by continually putting up prices?
Why are energy prices increasing?
Energy prices can increase for any number of reasons, from a greater demand for gas and electricity (this explains why prices usually go up as winter is approaching) to a rise in transportation and infrastructure maintenance costs.
Even things like political instability and natural disasters in oil and gas rich areas can affect the cost of gas and electricity here in the UK. This is because the instability brought about by wars and natural disasters usually leads to a reduction in production and accessibility.
And although it was brought in with the aim of cutting energy bills for around 11 million households, there’s no question that the introduction of an energy price cap has also helped to push up prices. To find out why, check out The Truth About the Energy Price Cap.
But an increase in wholesale energy prices is the reason most energy firms use to justify rate rises - wholesale prices rose by 30% in 2018, and these higher prices have since been passed onto consumer through higher energy bills.
Ofgem also cited rising wholesale costs as one of the main reasons for its decision to increase the price cap.
In an open letter to “all market participants and interested parties”, the energy regulator said:
"The three main drivers for this increase are due to updates in the model inputs for:
- Wholesale costs – these have increased by £74 since the last update. This is based on the direct fuel cost allowance for the forthcoming period, calculated based on forward energy contracts during the observation window. Over the last 18 months global factors have pushed up wholesale costs. Higher global oil prices pushed up wholesale gas prices; given the role of gas as a source of electricity generation this in turn increased the price of wholesale electricity."
It then added that an increase of £12 in ‘network costs’ and a £14 rise in ‘policy costs’ were the other two reasons for the price cap increase, but it’s clear that increased wholesale costs were the biggest driver.
This led to the major energy companies increasing price of their respective standard variable rate tariffs, four of which will now charge an average of £1,254 from April, in line with the price cap increase.
But these rates rises have been announced just as wholesale energy prices are falling, and falling quite significantly – not only was the decrease in energy prices between December 2018 and January 2019 the first drop since 2017, the 8.5% reduction in consumer gas prices represented the biggest fall in three decades.
While this should see the price cap fall again when Ofgem next reviews it to set the rate for October, is it really necessary for energy firms to increase rates in line with the cap in the first place?
Are energy firms ripping off UK households?
Three of the Big Six energy companies announced rate rises last week, to increasing levels of customer frustration. But it’s always been the case that when one of the major players announces a price increase, the others follow suit.
We decided to gauge consumer sentiment by putting out a poll on Twitter, and the results were pretty conclusive.
Three of the UK's #BigSix energy suppliers have announced price increases in response to the #EnergyPriceCap increase. Do you think this is down to #energy companies being greedy and squeezing households for even more money?— UKPower.co.uk (@ukpower) February 13, 2019
When asked whether the rate rises are simply a case of energy companies greedy and squeezing households for even more money, a whopping 90% of respondents thought this was the case, as opposed to just 4% who concluded it wasn’t down to greed.
Arguably the most interesting response was from the 6% who were unsure whether the energy companies had a choice when it came to increasing prices in line with the price cap.
The truth is, energy companies aren’t actually obliged to increase their rates to meet the level of the cap so, but the cap is set to reflect the current market conditions, meaning it’s in suppliers’ best interests to put prices up – remember, a rise in wholesale prices has been one of the main reasons why so many small energy firms have gone bust in the last year.
Although higher energy prices are not what households need right now, an increase of standard variable rates in line with regulator recommendations is probably to be expected.
The bigger issue is the number of energy companies adjusting their fixed rate deals to fall in line with the price cap – the number of cheap energy deals costing less than £1,000 per year dropped by 90% in 2018.
Switching to a fixed rate deal remains the simplest way to make big savings on your energy bills, but the amount you can save is slowly being eroded by suppliers’ response to the price cap.
Although it’s probably unfair to say that energy firms are ripping off consumers – their first concern will always be the viability of their own business, and the number of firms going bust will have spooked the industry – but automatically increasing prices in line with the price cap, especially on tariffs outside of standard variable rates, does appear to be particularly cynical and won’t do much to improve consumer confidence.
The big test could come in the next price review – if the rate drops and suppliers’ don’t lower their rates in line with Ofgem’s recommendations, then serious questions will need to be asked.
How to really beat the 'rip-off energy prices'
Switching to a better deal remains the only way to really beat the 'rip-off energy prices'. If you’re on a standard variable rate tariff, or your fixed rate deal is coming to an end, it’s time to switch energy supplier.
If you think switching energy supplier is too much hassle, think again. It only takes a few minutes to run an energy price comparison, and once you’ve found a deal you’re happy with, we’ll take care of the whole switch for you – you’ll be with your new supplier and saving money within a couple of weeks.
Pop your postcode in the box at the top of the page to get started, or give us a call on 0800 320 2000.
Click here to run an energy price comparison, and see if you could be paying less for your gas and electricity.