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Ofgem Calls for Lower Prices As Energy Markets Fall

As the markets continue to fall, Ofgem calls on energy suppliers to explain prices.

17.43 Tuesday 10th June probably passed by for most people without any notable difference from 17.42, 17.41 or any other point in the warm showery early summers day that was yesterday.

But for the PR departments and board rooms of the Big 6 energy suppliers the clock ticking over to 17.43 was the trigger for frantic calls, extended working days and lots, and I mean lots, of head scratching and defence building.

Why? Well 17.43 was the time Ofgem’s daily email hit its subscriber accounts. An email more used to announcing supply licence applications, new industry protocols and all too often the latest energy supplier fine. But yesterday the email was different, in that is was a little more shall we say incendiary.

Like the golfer who gets cocky after a good shot, the announcement of the Competition and Markets Authority Investigation into the UK energy market has put a swagger into the step of Ofgem, with a hitherto unseen boldness in staking their claim as an authority to be respected in the industry.

In a simply titled press release, Ofgem announced they were making:

“calls on suppliers to explain prices to consumers”

Ofgem had actually already written to the Big 6 energy suppliers to make their demand for transparency, but it was the email that was the catalyst for the media, wider industry and consumers to become aware of their move.

Cue headline news items across the networks and newspaper houses.

In their statement Ofgem said:

“In recent months, both wholesale gas and electricity prices have been falling significantly. In early June 2014, gas prices for next day delivery reached their lowest level since September 2010 and are now around 38% below this time last year.”

“The trend has been similar in electricity, with prices reaching their lowest level since April 2010 at the beginning of June. They are currently around 23% lower than this time last year.”

“While there are upward pressures on energy costs resulting from government schemes to support environmental objectives as well as energy network renewal, the costs of wholesale power and gas cost dwarf these and make up just under half the total household bill.”

It was almost as if Ofgem had been reading our guides to the market given the narrative rang so familiar!

Ofgem went onto underline their concerns that:

“Forward prices for gas and electricity have also fallen. Compared with last winter, gas and electricity prices for the coming winter are around 16% and 9% lower respectively than last year. This trend has been driven by the mild temperatures across GB and Europe last winter, leaving gas storage at record levels.”

In a damning slight, Ofgem added:

“In a competitive market the threat of losing market share would encourage suppliers to reduce their customers’ bills whenever there are sustained reductions in costs. Suppliers are yet to reduce their prices for existing customers to reflect the wholesale cost changes.”

The admission that the market is not as competitive as Ofgem has previously insisted was underlined by Dermot Nolan, their Chief Executive who since his appointment last year has been taking a higher profile, more aggressive stance than his predecessor, who said:

“The Big Six suppliers tell us that they think the market is competitive, but our research shows that consumer trust is low. Therefore if suppliers are going to start rebuilding that relationship they need to take the initiative and explain clearly what impact falling wholesale energy costs will have on their pricing policies.

In a move that will delight the smaller suppliers, Nolan added:

“If any of the companies fail to do this, consumers can vote with their feet. Independent suppliers are currently offering some of the cheapest tariffs on the market”

Ian Peters, Managing Director of Residential Energy at British Gas, fired an early defence with the common refrain of:

“We buy our gas well in advance, so movements in wholesale prices, up or down, do not feed through immediately to retail prices. We have other costs that are rising – regulated transport and distribution costs, environmental costs, metering costs. We are certainly not increasing profits on the back of lower wholesale gas prices. Our trading statement last month downgraded profit expectations.”

But regardless of the imminence or otherwise of the suppliers’ acting, the bearish sentiment in the market is set to continue with the key interconnector between the UK and Central Europe being shut down for a fortnight from today.

The interconnector enables UK gas producers to send gas to markets where price differentials can make any such more very profitable, especially when there is a glut of supply already in the UK market.

It is against this backdrop that the interconnector facility is temporarily closing, meaning no outlet for excess supply and therefore further downward pressure on the cost of gas in the UK.

Not only has the over-production of gas taken its toll on prices but so has the relatively abundant levels of gas in storage and the increasing number of LNG vessels docking at the Milford Haven terminal packed full of Qatari gas.

Domestic Energy Prices

So what does this mean for consumers?

Well it is to be expected that angry headlines and denials will be a feature of the next few days with some level of government comment and influence to move the Big 6 to action.

That action however won’t come quickly and if history is anything to go by, the energy suppliers will resolutely defend their territory in the hope that they can weather the storm.

Business Energy Prices

For business energy customers, however, the picture is far rosier.

As our energy guides explain, business energy is much more closely aligned to the prevailing market price that means that movements in the underlying wholesale energy costs are quickly reflected in the retail prices offered to customers.

Indeed in recent days we’ve seen suppliers slash their prices including an unprecedented drop of 11%, on a five-year gas contract!

Quite remarkable and a fantastic opportunity for businesses to lock in the pricing impact of these short-term market disturbances for their long-term benefit.

If you’d like to understand how your business could benefit from falling energy costs then please call us today.

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