Ofgem and Government also have a share in high energy bills

3 March 2017   By Samantha Smith

CITIZENS Advice have called on the Government to cap energy prices for people who are on standard variable tariffs (SVTs) and are eligible for the Warm Home Discount.

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Credit: chrisdorney/Shutterstock.com

This move would protect around 2.6 million people who are paying £141 a year more than they have to, just as a cap recently announced by Ofgem will protect customers on prepayment meters from April 1st.

However, while SVTs are overpriced relative to fixed tariffs, and while far too many customers remain stuck on them without attempting to switch, recent reports and research have shown that the profiteering of energy providers isn't the only thing pushing up bills.

Equally important are the Government levies and policies that impose extra costs on suppliers, as well as overly generous cost estimations made by Ofgem, who set price controls for energy networks.

Government 'meddling'

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This, at least, were the verdicts of the Economic Affairs Committee and once again Citizens Advice, who last week published studies on these two separate factors influencing energy bills.

The Economic Affairs Committee released a document called "The Price of Power: Reforming the Energy Market", in which they declared, "the interventions of successive governments to achieve [a low-carbon energy supply] have come at a high cost to the consumer".

Their research found that, because successive governments have striven to reduce the burning of fossil fuels by subsidising green energy sources, the "average domestic electricity bill was 58 per cent higher in 2016 than it was in 2003".

ComponentCost (and percentage of total bill)
Wholesale energy costs£235 (40%)
Network costs£139 (24%)
Supplier costs and margins£124 (21%)
Energy and climate change policies£59 (10%)
Vat (at 5%)£29 (5%)

Breakdown of electricity bill. Source: Department of Energy

Yet their criticisms ran deeper, going so far as to claim that government "interventions have also meant that there is no longer a competitive market for electricity generation".

Their conclusions followed from several premises. On the one hand, government subsidies for new power plants and energy projects distort competition, disincentivizing energy providers to lower their costs since they know they'll receive backing from the Government.

On the other hand, government policy is also disincentivizing green energy producers from being as competitive and cheap as possible, since at the moment, "Renewables are not currently competing on a level playing field for government support".

For instance, solar and wind aren't allowed at the moment to compete against other forms of energy generation in contract auctions, something which "does not lead to efficient economic outcomes in terms of value for money for bill payers".

The upshot of all this is that, despite the Government's best intentions to reduce carbon emissions, energy customers are paying for an arguably inefficient and needlessly costly system.

Ofgem's overestimations

This conclusion was echoed by Citizens Advice, who on the same day as the Committee announced research showing that "Ofgem overestimates how much pipes, wires and staffing will cost because they are using inaccurate forecasts - Ofgem's own research has found that these forecasts don't match the real costs".

And because the energy regulator overestimates these costs, the price controls they set for energy networks - such as the National Grid - are being set too high.

As Victoria MacGregor, the Director of Energy at Citizens Advice, put it, "Energy networks are being gifted huge profits that consumers have to pay for through their bills".

The charity estimated that these excessive profits amounted to an extra £2 billion over eight years, a sum of money that was mostly covered by the customer.

And while Ofgem recently reduced the National Grid's allowance for high pressure pipelines by £168.8 million, Citizens Advice urged the regulator to go further.

Otherwise, energy bills will continue being higher than they have to be.

Policy cap

Either that, or energy providers will see falling profits, as British Gas reported at the end of February, when they announced a yearly decline of 8%.

Because they have 6.6 million customers on a more expensive SVT, they've been under enormous pressure recently to reduce their standard tariffs.

To help those worst hit by high energy bills including some of the poorest pensioners and families, the government could extend the prepayment meter cap to all those eligible for the Warm Home Discount
Gillian Guy, Citizens Advice

While they didn't go so far as to cut prices, they did respond by extending a price freeze until August, and by announcing a loyalty scheme.

However, this isn't quite good enough for charities such as Citizens Advice, who today have announced that some of the "poorest pensioners and families in Britain are paying an extra £250 million each year for being a loyal customer".

As the Competition and Markets Authority outlined in June, there's little doubt that the disengagement and vulnerability of such customers often results in them being taken for granted by suppliers, who arguably use the higher tariffs they pay to subsidise better deals for new customers.

Still, while a price cap for them would be welcome, any move from Ofgem or the Government must be taken in the full knowledge that it's not only energy companies who are pushing up tariffs.

Unfortunately, it's also Ofgem and the Government, so as well as looking into an SVT price cap, they should perhaps also look into their own policies.

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