In a hard-hitting letter to the large suppliers, Ofgem outlined that failure to engage with consumers on this issue further risks undermining public confidence in the energy market if wholesale costs continue to fall.
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.
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 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.
Ofgem Chief Executive, Dermot Nolan, 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. 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. Impartial and independent advice on getting a better deal on your energy is available from the ‘Be an energy shopper’ campaign at www.goenergyshopping.co.uk.”
Ofgem is currently proposing referring the retail market to the CMA after a joint report with the OFT and CMA confirmed that competition is not working as well as it could.
Responding to Ofgem’s letter to suppliers on wholesale market costs, a spokeswoman for Energy UK said:
“Wholesale energy is just one of a number of costs outside of an energy company’s control, which make up a household bill. All energy suppliers aim to hold costs as low as possible for as long as possible.
“There are now 24 domestic energy retailers in the UK. They buy gas and electricity months and even years in advance to smooth out the swings in the market. When wholesale prices fall it can take time for bills to catch up as the gas and power may have been bought at a higher price some time ago.
“The suppliers also have to take all manner of risks and wider costs into account, including political and regulatory issues. The industry is committed to openness and will be answering the questions on wholesale prices to their customers and to the authorities.
“We would encourage customers concerned about their bill to contact their energy supplier and ensure they are on the cheapest tariff for their circumstances. The industry believes an honest conversation is needed about the way both gas and electricity prices are impacted by changes in the wholesale market. This year, Energy UK has been publishing a regular wholesale electricity market report to ensure existing market information is readily available.”