Why are gas and electricity prices so high when wholesale energy prices are falling?

One of the most common gripes people have about their energy supplier is that their bills seem to perpetually increase, regardless of the wholesale cost of gas and electricity.

Wholesale energy costs have plummeted recently – Ofgem notes that wholesale electricity costs have seen an annual fall of 23%, with gas prices plummeting by 38% over this timeframe. This means that electricity is the cheapest it has been since September 2010, and gas has not been so cheap since April 2010.

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Despite this, the Big Six energy companies—British Gas, E.ON, nPower, Scottish Power, SSE, and EDF Energy—have shown no inclination that they intend to cut their customers’ bills, nor are they even explaining the reasoning behind their prices.

The wholesale market is not the only factor in energy prices; green tariffs, government schemes, and infrastructure investments also have an influence – but Ofgem revealed that the impact of wholesale energy “dwarfs” these other variables and makes up slightly less than half of the cost of a household’s energy bill.

Falls in the cost of wholesale energy look set to continue in the future, as well. Gas should cost 16% less in the coming winter than it did last winter, while electricity looks set to cost 9% less.

Gas storage across Europe has reached record levels following the relatively mild winter of 2013/14; there is plenty of gas available for our most vulnerable members of the community to use their central heating when the temperature drops, if only energy suppliers would reduce their prices to reflect their actual costs.

Accordingly, the energy regulator asked the Big Six to state what effect the declining wholesale value of energy will have on people’s utility bills.

If the market was truly competitive, then energy companies would worry that they would lose out on customers if they did not lower their prices when wholesale costs fell, but suppliers have not yet cut their prices, pointing to competition issues within the sector.

Indeed, Ofgem, the Office of Fair Trading, and the Competition and Markets Authority recently found that competition between the Big Six is “weak,” that there are barriers that prevent start-ups from entering the market, and that customers have low trust and low engagement with the industry, which may be negatively affecting consumers and businesses.

Chief Executive of the energy regulator, Dermot Nolan, said if suppliers wish to regain their customers’ trust, they will have to “clearly” explain what effect the decline in wholesale energy costs will have on bills.

He said their customers can “vote with their feet” if any of the Big Six fail to do so, pointing out that some of the cheapest tariffs currently available are offered by independent suppliers.

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