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Energy – The industry of misinformation?

A view from the floor

In the first of a new series of articles written by our Business Advisors, James Rippin explores the potential vested interest in the government being economical with the truth about the true cost of energy.

Energy – The industry of misinformation?

It’s fair to say that energy is an industry lacking in transparency. This in turn often results in poor experiences for customers who lack access to the information they need when trying to get the most out of their energy contracts.

A lot has been happening in the energy markets recently. The falls in gas and electricity wholesale prices have resulted in a media and political circus, which has bought the energy industry to the forefront of mainstream media. This has resulted in a plethora of information, which in itself would be useful for the average business or domestic customer. However the nature of this information could be damaging if it, and its sources, are not properly scrutinised.

This article looks at the information stemming from the government, through the mainstream media, to consumers; and how, given that it is often depicted as impartial and all knowing, this information can be extremely damaging to customers trying to better understand the energy markets allowing them to make the most out of their contracts.

Constant regulation and surveillance by the government and free press are positive influences on the customer experience. Government pressure on suppliers to pass the wholesale savings onto domestic customers should also be commended (for business customers whose contracts are linked to the current day’s wholesale markets and are not subject to supplier hedging strategies these savings have been available for much longer – openness to the volatility of the daily markets would be an admittedly undesirable experience for any domestic customer).

With the UK general election just round the corner it could be argued that a tough stance on the energy industry, and the all too easy vilification of the suppliers, is a great way to score political points.

Unfortunately the flip side of this, is that any information that could be potentially damaging to the government’s image as consumer champion is all too conveniently omitted from the current rhetoric surrounding energy prices and their effects on consumers.

“Third Party Charges”

From previous Business Juice articles, you can see that the wholesale price accounts for around 35% of your electricity unit rate and 45% for gas. The rest is made of third party charges covering:

  • Network costs
  • Generation costs
  • Supplier margins
  • Green Levies.

Allow us to focus on the green levies. These include Feed in Tariff charges, Renewable Obligation charges (soon to be replaced by Contracts for Difference) and supplier carbon taxes (these are paid by the supplier but the cost of these taxes are passed through directly to consumers).

These charges are extremely necessary. The UK has CO2 emissions targets it needs to hit under the Kyoto Agreement and it can’t be disputed that tackling climate change is a vital human endeavour.

However, it is not common knowledge that as these charges are built into the unit rate, they are subject to standard VAT. In essence every energy customer pays tax on taxes (though they are very carefully called charges not taxes).

Again, it must be stressed these levies are vital, as is the revenue generated through VAT as it funds public services. Nonetheless it is wrong of the government to attack suppliers for lacking transparency with this glaring omission from themselves.

Where are prices heading?

It is easy to be swept up by the recent wholesale market lows, but the lack of context with respect to the future of energy prices could result in poor contracting decisions for customers.

In terms of the wholesale markets, we as a nation are increasingly reliant on foreign imports, in fact with respect to gas Ofgem state foreign imports will increase by 60% by 2020.

If we also take into account a statement released by DECC, claiming £41.6bn of investment will be needed by 2020 to keep the national grid at operational standard, and the fact that green levies will continue to rise – the UK carbon tax is set to increase April 1st – it can only be assumed that over the coming years customers will feel the strain of rising energy bills.

The fact that this information is not made readily available to those who do not actively seek it out – and even then it is very difficult to find – domestic customers are given unrealistic expectations of the future of the energy markets, and more importantly, business customers could potentially be scared away from the benefits of longer contracts which could prove costly in years to come.

My advice?

We live in the age of information and any consumer should readily gather this information, particularly at a time where the energy industry is being debated so incessantly in the news. The more one understands the energy markets, the more they can get out of their contracts. However a little scrutiny and critical analysis can go a long way. Don’t allow misinformation to lead you into choosing the wrong contract options for your business, and more importantly, don’t believe everything you read, as much of the time, you are only getting half the story.

James Rippin