26 Mar 2014

Energy supplier SSE sacrifices profits to freeze prices

SSE, one of the ‘big six’ energy firms, announces a price freeze for all customers until 2016. Last year its chief executive said a freeze would “lead to unsustainable loss-making businesses”.

SSE says its commitment to freeze prices until 2016 is “the longest unconditional price guarantee the domestic energy market has ever seen.”

The move is expected to reduce the company’s profit margin in its customer supply business from 5 per cent to 2.5 per cent, and will be partly funded by cost savings arising from the loss of around 500 jobs through a voluntary redundancy programme across the company.

SSE will also shelve plans to develop two onshore wind farms which is says are no longer financially viable.

I hope that people will see a company like SSE not as part of the problem but as part of the solution SSE Chief Executive Alistair Phillip-Davies

Energy Secretary Ed Davey welcomed the announcement, and called on other major suppliers to follow suit, saying: “SSE have shown today that the big energy firms are able to cut their costs and profits, and be confident about their ability to weather potential uncertainty in the wholesale markets, to give bill payers long-term price security.”

SSE Chief Executive Alistair Phillip-Davies said the freeze would reduce profits for 2015 by £100m, but said “we felt the need to make a bold statement.”

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In September 2013, when Labour Party leader Ed Miliband unexpectedly announced that an incoming Labour government would freeze household energy bills for 20 months, Mr Phillip-Davies said “instead of price freezes, which will lead to unsustainable loss-making retail businesses, the Labour Party should put policy costs into general taxation, taking them off energy bills.”

Welcome U-turn

In November 2013 the company raised its prices by 8.2 percent, but after the government acted to remove green levies from bills, it announced it would cut average dual-fuel prices by 3.5 per cent from 24 March 2014.

Ann Robinson, Director of Consumer Policy at uSwitch.com, said “This is a U-turn to be applauded. SSE was the last supplier to pass on the Government’s levy cuts and reduce customer bills this winter – now they are the first to freeze prices until 2016. We welcome this commitment.”

Speaking at prime minister’s question time, David Cameron described the SSE move as “hugely welcome”.

Challenged by Labour leader Ed Miliband to answer why “a price freeze was wrong six months ago, but is the right thing to do today?”, Mr Cameron insisted that the government’s decision to scrap environmental levies from bills had already led to price reductions for many consumers.

But in a response to Labour’s plans for the energy market, SSE warned:

“Price rises in recent years have been due to a combination of rising wholesale costs, rising network costs and rising government scheme costs. These costs are forecast to increase up to 2020… An externally-imposed 20 month price freeze would not reduce the costs of supplying energy.”

Speaking to Channel 4 News (see video above), Mr Phillips-Davies warned that the cost of government levies on bills remained at £100 and was due to rise to some £200: “If we can take those levies off the bills, I suspect we can get well into 2017 for a price freeze, so if the political parties are willing to work with us, it can be done, but we need them to act as well: we can’t do it on our own.”

Increased transparency

SSE also announced that it would be legally separating its retail and wholesale businesses “to enhance transparency”.

The larger energy companies have been accused of using opaque company structures to frustrate true competiton. Shadow Energy Secretary Caroline Flint wrote in an article in the Telegraph last year: “Ultimately, when the same company can buy energy from itself to sell on to consumers, there is little incentive to keep prices down.”

A review of competition in the energy industry, being carried out jointly by Ofgem, the Office of Fair Trading and the Competition and Markets Authority, is due to be published by the end of the month.

Alistair Phillips-Davies, Chief Executive of SSE, said today:

“We’re setting out a positive agenda for customers, including our price freeze to 2016; we’re making sure our own house is in order for the future by streamlining and simplifying our business; and we’re making clear we wish to work with people to find more ways of taking costs out of energy bills.

“In all of this, I hope that people will see a company like SSE not as part of the problem but as part of the solution.”