29 Oct 2013

Energy bosses blame high bills on wholesale prices

Energy company bosses tell MPs that wholesale price rises, transport costs and green taxes are behind the recent hikes passed on to consumers.

MPs on the energy and climate change committee fiercely questioned companies about their pricing policies and the impact of soaring bills on millions of consumers.

Guy Johnson, external affairs director of npower, which has announced average rises of 10.4 per cent, said the largest driver of price rises had been the cost of the so-called climate obligation on power firms.

The green taxes cover the period to March 2015, so the energy firms will have to fulfil a large part of their obligation next year, he said.

“That was a concern when we were considering prices for next year.”

Mr Johnson said firms were faced with increases in wholesale prices of 3 per cent, increased transport costs of 10 per cent, while costs such as the environmental obligations had jumped by 31 per cent.

“External costs are driving our prices increase,” he maintained. “We are not raising them in anticipation of a price freeze.”

William Morris, managing director of SSE, which has announced a 8.2 per cent price rise, said he regretted having to increase bills for customers, who were “struggling to maintain their budgets”.

He said SSE’s transport costs had increased by 10 per cent, while the government’s environmental schemes had risen by 13 per cent.

“We would like to see those costs taken off the customers’ bills and onto taxation. We welcome the government’s decision to review that.”

‘Worst offender’

But Stephen Fitzpatrick, managing director of Ovo Energy, one of the smaller brands on the market, told MPs he “can’t explain” the price rises being imposed by his larger rivals because his company was buying gas at a cheaper price than it had in 2009.

“It looks to me like a lot of energy companies, a significant number of the big six, are charging the maximum price they feel they can get away with to the customers that they feel will not switch under any circumstances, and then maintaining the illusion of competitive pricing with tariffs targeted towards a very small number of relatively well-engaged customers,” he said.

“In the case of npower, which is the worst offender, historically and today the price differential is about 16 per cent, which is about £200.”

He added: “We buy all of our power and gas on the wholesale market, and the easiest way I can explain what has happened to you in the wholesale market in terms of pricing is that the most expensive price we have paid for wholesale gas in the last four years was in, I think, May 2011, that was 74p a therm.

“Since then it has been below 72p a therm for this winter, last winter and next winter. We are buying gas for next winter at a current price of 69p a therm.

“So I can’t explain any of these price rises, other than they are not the prices we see in the liquid wholesale market.”

Energy companies defend price rises to committee of MPs (Image: Reuters)

‘Stealth tax’

Mr Fitzpatrick added: “I think it is common practice among several of our competitors that they load the environmental and social obligation costs on to those customers that are less likely to leave.”

He has previously suggested that the larger energy companies pay over the odds for energy when their retail arms buy from their own wholesale divisions – a claim the other energy bosses denied today.

Pressed on the claim, Tony Cocker, chief executive officer of E.ON, said: “We buy our electricity and our gas for the retail business from the market via our trading business.

“We operate our businesses on a standalone basis. There is absolutely no cross-subsidy between the businesses.”

Mr Cocker said E.ON had not yet made a decision on whether to follow the other firms and increase prices.

“We will hold our prices as long as we can,” he told the MPs, adding that his company faced the same pressures as the other firms, with rises in wholesale and network costs, as well as the social and environmental obligations.

He described the cost of the green schemes as a “stealth tax” or “poll tax”, adding that eco-reforms should be introduced in a more measured way.

Mr Morris said that companies would reduce bills as quickly as possible if the government decided to scrap the green taxes.

Companies have estimated that bills could be cut by around £60 if the green taxes were scrapped.