Competition benefits gas and electricity market

18 November 2009 09:40:50

Firms have introduced attractive gas and electricity tariffs.

With the colder weather and the darker nights leading to increased use of electric lights and central heating, it is the time of year when UK householders are suffering the traditional seasonal increase to their gas and electricity bills. The good news is most householders can cut their fuel costs simply by taking the time to shop around for the best deal. However, recent evidence has shown that, with the economy still in recession, many are finding meeting their energy bills a struggle. The financial effects of fluctuations in the wholesale fuel markets also pose a long-term threat to price stability.

Calmer market

Energy bill trends so far this year have failed to match the extreme volatility of 2008. This is partly due to recent activity on the wholesale markets.

Suppliers buy the gas and electricity they sell to consumers on these markets, meaning that wholesale trends exert a considerable influence on consumer bills. Therefore, many householders suffered financially as a result of the energy price spike of last summer, when the global financial crisis was at its height and nervous investors sent commodities prices soaring. These cost pressures forced energy firms to act, with general tariffs rising across the board. One firm even increased its gas prices by 35% in a single radical move.

With the economy now apparently on the rebound from its credit crunch-induced downturn, the wholesale fuel markets have largely stabilised and suppliers have reduced prices for their existing customers. Several best-buy tariffs have also been introduced for savvy householders willing to change to a new supplier.

In early October, E.ON fired the first shot in the price war by reducing the cost of its FixOnline 3 tariff to an average of £962 per year for dual fuel customers. First Utility then cut its iSave deal to £954, before Ovo Energy introduced its New Energy Plan, carrying a nationwide average cost of around £921. Scottish Power has also reduced its Online Energy Saver 7 deal to £952 a year.

While customers might be tempted by these best-buy deals, it is worth checking the small print before signing up. For example, the New Energy Plan includes a clause which could oblige any customer who wishes to cancel within a certain time period to pay a £30 fee. This means that customers who feel they might want to switch away from Ovo Energy immediately if a better deal is offered elsewhere might be left out of pocket by the process. The cheapest energy tariff available can also vary from region to region, suggesting that customers should always do their own research rather than switching on the basis of a best-buy list alone.

Problems for customers

Many consumers still face a tough task in paying for their gas and electricity, making the need to save money through switching to the best deal as important as ever. For example, latest government figures show that there are 6.6 million people in the UK in "fuel poverty", which is defined as a household spending more than 10% of its income on energy bills.

There are a range of programmes from government and energy suppliers currently available to vulnerable customers. These include grants for the installation of insulation in homes to improve energy efficiency and the Warm Front scheme, which sees pensioners getting payments of up to £400 to help towards their winter fuel bills. The upcoming national roll-out of smart metering, which will help customers to more closely monitor their energy usage, could also cut costs.

However, a recent survey from Consumer Focus Scotland showed that "significant barriers" remain for disadvantaged customers who wish to switch. Primarily, the low-income consumers, including many using pre-payment meters as they do not have a bank account, were found to be "having difficulty understanding their energy bills". Automated phone lines run by suppliers were found to cause frustration, while a wider mood of "inertia, uncertainty and anxiety" about energy bills was also noted by the organisation. "This research highlights that those who might most benefit from switching energy supplier are currently least likely to do so," Trisha McAuley, interim director at Consumer Focus Scotland, said.

The future

Energy customers in the UK also face an uncertain next few months, following the recent price reductions and best-buy launches. In its latest profits statement released last week, Scottish & Southern Energy warned that it might not be able to match the price cuts it made in March 2009 over the months to come. The firm also said it was facing higher forward annual wholesale prices. Needless to say, another rise in wholesale fuel costs will affect all suppliers and would also, most likely, be passed on to customers.

Ofgem also provided a gloomy long-term view of future price trends in a recent report, which suggested that consumer gas and electricity prices could rise by around 25% above inflation by 2020. The regulator also forecast a worst-case scenario in which prices will briefly rise by up to 60%. Increases are to be stoked by a lack of fuel supply and the cost of implementing various environmental programmes designed to reduce carbon emissions, Ofgem predicted.

Despite these downbeat forecasts, there are many bright spots on the horizon for energy customers. For one, regulation of the energy market is to become tougher over 2010, with rule changes to include a crackdown on aggressive "doorstep selling" of overpriced gas and electricity plans. Energy bill pricing will also become clearer, making it easier for customers to measure the value for money they are getting from their provider and the first annual statements will be sent out from next July as part of this process.

These rule changes should not obscure the fact that much of the ultimate responsibility for the cost of a household energy bill lies with the customers themselves. So why not take the initiative and find out how much you can save by switching to another supplier?

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