MPs on the House of Commons Business and Enterprise Select Committee have warned that gas and electricity price hikes in the near future will have serious consequences for millions of households.
In the conclusions and recommendations to its latest report, published last Monday, the Committee says: ‘1. The evidence we have heard during this inquiry can lead to only one conclusion – that whatever short-term fluctuations occur, and whatever regulatory action is taken in the UK to improve the functioning of the energy markets, as the Minister of State for Energy, Malcolm Wicks, recently stated: “the era of cheap energy is surely over”.’
‘2. Wholesale gas prices have increased throughout 2008. As a result, we expect gas and electricity bills for domestic consumers to rise significantly in the near future, over and above the increases already announced this year, with serious consequences for millions of households, and especially the fuel poor.
‘Industrial consumers now face prices above European levels.
‘If these price differentials are sustained, they will affect the competitiveness of the UK economy, and put many thousands of jobs in manufacturing at risk.
‘3. We welcome Ofgem’s inquiry into the energy markets. Our written and oral evidence has highlighted serious problems in the functioning of a number of aspects of the markets for gas and electricity.
‘We are particularly concerned by the perception that Ofgem has already predicted the outcome of its inquiry by stating at the outset that it has seen “no clear evidence that the market is failing”.
‘We hope this perception is proven wrong, and intend to scrutinise the regulator’s findings thoroughly. . .
‘4. . . We received a significant amount of contradictory evidence, particularly in relation to the functioning of the wholesale markets for both gas and electricity, which was a cause of deep concern to the Committee, and emphasises the magnitude and importance of Ofgem’s task. . . .
‘6. We are troubled by the apparent discrepancy between the figures cited by our various witnesses on the extent to which gas is delivered to the UK via off-market contracts, as opposed to the visible market. . . .
‘7. While the UK has one of the most liquid spot markets for gas in the world, industrial consumers and Energywatch have significant concerns about the lack of liquidity in the forward gas market – an issue our predecessor Committee raised in 2005.
‘Given the apparent impact on the prices major users pay in comparison to their competitors on the Continent, we recommend that Ofgem investigates urgently why gas producers seem unwilling to trade in the forward market. . .
‘8. The implication of the UK’s growing gas import dependency is that it must increasingly compete in European and global markets. . . .’
The report notes that the oil price will ‘continue to have a significant influence on UK gas prices. . .’
It adds: ‘15. Trading on London markets plays an important role in setting the global price of oil. . .
‘We consider, however, that the Financial Services Authority would be well advised to investigate the extent to which speculators within its jurisdiction are currently driving up global oil prices, and to take action if appropriate.’
‘17. One of our major concerns is that Ofgem’s investigation is not giving more explicit attention to the wholesale gas market. . .
‘18. It is clear that the “Big Six” firms and the independent generators have, to varying degrees, benefited financially from the free allocation of permits in Phase 2 of the EU Emissions Trading Scheme.
‘However, the magnitude of this windfall is not clear. . .
‘We are disappointed by the superficiality of Ofgem’s current analysis. We recommend that the government now conducts and publishes a rigorous analysis, estimating the value of any windfall profits which companies have gained, and the use to which they have been put, or are planned to be put. . .
‘21. While the “Big Six” claim to be losing money in domestic supply, there is evidence that they are earning increased profits from their wholesale operations. . .
On electricity, the MPs say: ‘22. . . We note that while the “Big Six” have cited rising wholesale prices as the reason for collectively increasing prices in 2008, it required a “naming and shaming” by Ofgem for two companies to reduce their retail prices in early 2007, when wholesale prices were falling. . . .’
And on ‘Payment Types’, the MPs add: ‘27. There has been a widening gap between companies’ direct debit tariffs and those for standard credit and prepayment meters (PPM).
‘Nine years after liberalisation, this suggests a serious failing in the competitiveness of the market.
‘Recent debate has focused on the prices for PPM.
‘However, we are equally concerned about the poor deal standard credit customers are receiving, particularly given that this is the payment method for the vast majority of the fuel poor and the evidence suggests they are on average being over-charged even more than those on PPM.
‘28. This issue is a major part of Ofgem’s probe. In a fully competitive market the tariff differences for each payment type would not exceed their economic cost; there would be no cross-subsidy between, for example, standard credit and online direct debit customers.
‘The regulator’s probe must form a robust view of the additional costs associated with standard credit and PPM customers.
‘If, in a year’s time, the “Big Six” have still not narrowed the gap between the different payment types, Ofgem should consider re-introducing some form of price control, limiting the differentials that can be charged.’
On ‘recent developments in fuel poverty’, the MPs say: ‘36. Other things being equal, with every 10% increase in energy prices 400,000 people go into fuel poverty.
‘The rise in prices since 2004 means the government is certain to miss its target of eradicating fuel poverty for vulnerable households by 2010. . .
‘We believe the government must now consider a fundamental re-think of its approach to tackling fuel poverty.
‘37. In rethinking its approach to fuel poverty the government must decide whether companies should have a larger, perhaps statutory role to play in delivering its social policy objectives – that is, to what extent energy companies should be expected to divert their profits away from investment and distribution to shareholders.
‘And to what extent relatively more affluent energy consumers, many of whom are themselves far from rich, should, through the price they pay for their electricity, cross-subsidise those who are less well-off.
‘This cross-subsidy is currently modest, but it would inevitably grow if social tariffs were to be expanded.
‘38. Energy suppliers’ existing social assistance initiatives (which go well beyond specific tariffs) do not reach the vast majority of the fuel-poor.
‘They also vary widely, confusing consumers and providing inconsistent coverage.
‘Irrespective of its broader conclusions on the role of such tariffs, we believe the government should define the criteria for both the prices charged by suppliers under the banner of social tariffs, and for identifying those customers that qualify for them.’
In the Raising Incomes section the report states: ‘39. The Winter Fuel Payment is targeted at pensioners rather than the fuel-poor. The political reality is that either removing it from any existing recipients, or taxing it, to release funds for the genuinely fuel-poor, would be courageous decisions.
‘However, we believe that any additional funds to help households cope with rising energy prices should be better targeted on the fuel-poor – not only pensioners, but also disabled people and other vulnerable consumers.’