Ofgem has warned energy companies to absorb a large increase in energy costs so that consumers do not have to contend with price hikes in energy bills.
The regulator estimates that there has been a 15 per cent increase in the cost of supplying energy in the last year, as a result of wholesale energy market gains and the Government’s renewable energy programme. But Ofgem chief executive Dermot Nolan has asked that suppliers not transfer the price increases to consumers but rather absorb them by increasing competitiveness.
“It’s not obvious that there should be significant price increases across the market and it would be up to suppliers to justify this to us and to their customers,” said Mr Nolan.
Power prices last year were largely affected by a big increase in wholesale gas costs but Mr Nolan believes that these costs should also be covered by suppliers.
“It’s far from unprecedented,” said Mr Nolan, referring to similar increased in 2008 and 2013. He went on to say that larger companies should mitigate the problem by purchasing their energy years in advance.
In 2013 suppliers referred to long-term hedges as the reason for keeping energy bill costs high – even in the midst of a 30 per cent decree in market prices over six months – stating that these lower costs would not reflect in household costs for a while.
Mr Nolan warned that bills should not hike quickly if they are going to fall slowly.
“The key point energy companies make about about hedging is that if costs are falling, you cannot expect retail bills to fall as quickly because they smooth out the market impact on bills. But it works the other way, too,” Mr Nolan said.
Levies that contribute to supporting renewable energy comprise less than a quarter of the entire cost increase that suppliers face and have been known by the industry for years, Mr Nolan stated.
“I would hope that they would offset the increase in Government obligations through efficiencies - that’s what they are supposed to do,” he said.
A few energy suppliers have raised their short-term fixed-rate tariff products – aligning with Ofgem’s cost index. But the regulator said standard variable tariffs should remain in place, alleging that they were already too high – not following suit and reducing costs when they were decreasing in 2015.
Ofgem is being pressurised to take a firm stand with energy suppliers that have upset and angered consumers, politicians and the Competition and Markets Authority in recent years.
Robert Buckley, a director at consultancy Cornwall Energy said at the end of 2016, that he did not see a reason for the ‘big six’ (British Gas, SSE, EDF Energy, Eon UK, npower and Scottish Power) - to not be able to maintain steady energy prices for numerous months.
But he expressed warning that with costs starting to filter through, along with increased green levies, price rises are a possibility towards the end of 2017.
“Ahead of next winter, it’s a wholly different ball game,” he said.