Household energy prices from 14 September 2011
21 Jul 2011
SSE (Scottish and Southern Energy plc) will increase prices for household electricity by 11% (average) and household gas by 18% on 14 September 2011. After that, it will not implement another household energy price increase before August 2012 at the earliest.
When did SSE last increase household energy prices?
SSE: SSE last increased electricity prices in August 2008 and gas prices in December 2010.
How many customers will be affected?
SSE: Around 5.2 million household electricity customers and around 3.6 million household gas customers in Great Britain.
What will happen to customers’ bills?
SSE: Based on the new typical annual household gas consumption adopted by Ofgem in November 20101 of 16,500kWh, and the typical annual domestic electricity consumption of 3,300kWh, SSE’s typical dual fuel bill will be £1,265, up from £1,094 at present. This reflects increases in both fixed charges and energy unit prices. On this basis, SSE’s new prices will be lower than those being charged by Scottish Power from 1 August and by British Gas from 18 August.
For how long is SSE guaranteeing that the energy prices being implemented on 14 September won’t go up again?
SSE: SSE will not implement another increase in the price of household electricity or gas before 1 August 2012 at the earliest.
Does that means prices will be stuck at the 14 September level?
SSE: Not necessarily. A sustained fall in wholesale energy costs would allow household prices to be reduced.
Why will prices go up on 14 September?
SSE: Three things are putting upward pressure on prices. First, the cost of using the energy networks to distribute electricity and gas to customers’ homes2, which is determined by Ofgem, is 14% higher than it was a year ago. Second, the cost of the mandatory environmental and social schemes that suppliers are required to fund, like the Carbon Emissions Reduction Target (CERT) and the Warm Home Discount3, is 11% higher than it was a year ago. Third, the wholesale cost of electricity and gas has gone up by around 23% and around 40% respectively since SSE last announced a price increase for household gas4.
What is causing wholesale energy prices to rise?
SSE: Events such as the earthquake and tsunami in Japan and political upheaval in the Middle East, and longer-term trends such as the fast-increasing energy needs of the Asian economies, have contributed to the rise in wholesale energy prices. Ofgem has characterised this as ‘turmoil in global energy markets during 2011'5 The UK is increasingly exposed to such turmoil because its own oil and gas resources are declining.
Consumer bodies say the reasons for price increases need to be ‘transparent’. Are they?
SSE: Yes. Prices are going up because of rising wholesale costs, which are determined on open markets, and the impact of increasing distribution, environmental and social costs, which are determined by Ofgem and the UK government. Detailed information about wholesale energy prices (see, for example, Bloomberg, Reuters, ICIS Heren and others), energy distribution costs (see http://2010.energynetworks.org/use-of-system-charges/ ) and the various obligations on energy suppliers (see for example .www.ofgem.gov.uk and www.decc.gov.uk) is publicly available.
What will make up a typical ‘dual fuel’ bill from 14 September?
SSE: A typical SSE dual fuel bill of £1,265 from 14 September will be made up of: distribution costs – 19%; metering and customer service costs – 12%; mandatory environmental and social costs – 8%; and VAT – 5%. The remaining 56% covers energy costs. As recently as 2008, energy accounted for 61% of a typical dual fuel bill. The fall to 56% in 2011 shows the increasing impact of distribution, environmental and social costs on household bills.
Will these price increases make a typical ‘dual fuel’ bill the highest SSE has ever charged?
SSE: The previous peak for a typical SSE dual fuel bill was established in August 2008, when it was £1,259. That was based on the typical annual household gas consumption used at that time by Ofgem (20,500kWh). Based on the new typical annual household gas consumption adopted by Ofgem in November 2010, SSE’s typical dual fuel bill from 14 September will be £6 (or 0.5%) higher than the August 2008 level, at £1,265. This reflects the fact that energy prices are not the same as energy bills and that energy efficiency has improved significantly in the past few years, thanks in part to schemes like CERT. Clearly, however, unit prices for energy will be the highest ever.
If wholesale energy prices are lower than they were in 2008, why are unit prices for household energy going to be higher than they were then?
SSE: There are two main reasons for this. First, SSE made sure customers were protected from the worst effects of the wholesale price peak experienced in 2008. Second, distribution, environmental and social costs are significantly higher than they were three years ago. This means energy now accounts for a lower proportion of bills than it used to, down from 61% in 2008 to 56% now for a typical dual fuel customer.
When will SSE’s customers find out more about the price increase?
SSE: Energy suppliers are required to give every affected household customer at least 30 calendar days’ notice in advance of the effective date of any price increase. This means affected customers should receive a letter from SSE by 15 August 2011. In the meantime, information is also available on SSE’s customer websites6.
Won’t this increase result in more people being in fuel poverty?
SSE: Yes, unfortunately, and SSE is very sorry about the impact that rising energy bills, along with other rising costs, such as food, has on many households. As currently defined, fuel poverty arises from people having insufficient income, living in poorly-insulated homes and spending a lot of their income on energy. SSE believes that continuing to invest in energy efficiency is crucial, as is giving practical help for vulnerable customers, and has also submitted ideas to the Hills Fuel Poverty Review which would help fuel poor customers.
What is SSE doing to help customers who may have difficulty in paying their energy bills?
SSE: There are five clear ways in which customers are being helped to deal with rising energy prices. First, under the Warm Home Discount, introduced following the Energy Act 2010, SSE will give assistance to vulnerable customers worth around £45m during 2011/12. Second, SSE provides tailor-made payment arrangements for around 250,000 customers to help them pay for the electricity and gas they use in a way that suits their circumstances. Third, SSE expects to fund and manage over 300,000 installations of cavity wall and loft insulation in homes throughout Great Britain this year under the Carbon Emissions Reduction Target. Fourth, between 1 December 2011 and 29 February 2012, SSE will again introduce its no disconnection policy covering all customers. Fifth, SSE will build on its work with partners including consumer bodies and voluntary organisations to help customers in an environment of rising prices.
Why have energy companies been accused of ‘profiteering’?
SSE: That may be the perception, but it is not the reality. According to analysis of Ofgem reports7, the average margin in supplying a typical dual fuel customer since 2004 has been negative, at -2.7%, and the actual margin has been negative for around two thirds of that time. ‘Negative’ means companies losing money on supplying energy. No business can sustain loss-making activities over the long term.
If SSE is a making a profit from activities other than energy supply, why can’t it hold off delaying prices for longer?
SSE: SSE’s Generation and Supply business, covering electricity generation and the supply of electricity and gas, achieved an operating profit of £882.8m in 2010/11, a fall of 1.5% on the previous year. From this operating profit, SSE has to do things like pay tax to the UK Government and pay interest on the money it has borrowed to finance its investment programme. Under that programme, SSE invested £910.9m in electricity generation in 2010/11 – more than it achieved in operating profit. Investment like this is needed if the UK is to meet its legally-binding energy policy objectives. It’s also worth bearing in mind that Ofgem has said that it ‘expects efficient firms to make a profit’8. No business can sustain loss-making activities over the long term.
Is this increase an example of household energy prices tending to rise more quickly than they fall in response to wholesale price changes, of which Ofgem said earlier this year it had ‘evidence’?
SSE: No. For a start, Ofgem itself said that its evidence was dependent on the analysis techniques used9. The evidence was included in a document that was issued for public consultation rather than as definitive findings. The issue is that the analysis assumes a constant level of household energy consumption between 2004 and 2010 when, in fact, average consumption fell significantly. This means that fixed costs like distribution and environmental obligations, which are in themselves rising, have to be recovered from fewer units of energy sold to customers. Moreover, Ofgem‘s own figures for 2004 to 2010 indicate that for most of this period supply businesses were making a loss on household energy sales.
Is it true that energy suppliers ‘like the comfort of the pack’, as one consumer body has alleged?
SSE: No. There is no ‘comfort’ in Britain’s energy retail market. Around 15% of gas customers and 17% of electricity customers switched supplier in 201010. This compares favourably with almost every energy market in the world. A recent European Commission study found that 85% of customers in Great Britain could find or receive a cheaper price for electricity than their present tariff – the second highest in Europe11. The extent of the choice of tariffs and services available to customers means there is a wide variety of energy products and services, consistent with a competitive market. This has been added to by the recent launch of Co-operative Energy.
If the market is competitive why do price rises appear to come in waves?
SSE: All energy suppliers face similar external cost pressures – with wholesale energy being the most significant of these. At the same time, the competitive market, and the scrutiny to which it is subjected, exerts a downward pressure on household prices. In this environment, suppliers have different energy procurement strategies, different service standards, different products and different operating costs. They set different prices at different times. In line with that, SSE is making a commitment to customers not to implement another increase in household energy prices before August 2012 at the earliest. It is also increasing its Direct Debit discount from 5% to 6%.
How does SSE respond to claims that energy companies are ‘bamboozling’ customers with ‘complex tariffs’?
SSE: Having a variety of well-designed tariffs means customers can make choices based on their specific needs and circumstances. By transforming communications between customers and suppliers, smart metering will add to this choice. SSE does agree with Ofgem and consumer bodies that steps need to be taken to make price comparison easier for everyone and is developing proposals for a standard comparison metric, to be applied to every electricity and gas tariff, to help make this happen.
1. See Decision letter: Revision of typical domestic consumption values, 5 November 2010. Based on a quarterly "dual fuel" standard tariff bill averaged across Great Britain.
2. Based on the Use of System charges published by network operators; April 2011 compared with April 2010
3. Based on the outlook for environmental social schemes at April 2011 compared with April 2010; includes CERT, CESP, FiTs, EU ETS, ROCs and Warm Home Discount
4. Forward annual wholesale electricity and gas prices. Source: ICIS Heren.
5. Ofgem press release, 22 June 2011
6. southern-electric.co.uk, hydro.co.uk, swalec.co.uk, atlantic.co.uk
7. SSE calculation from Electricity and Gas Supply Market Report, March 2011
8. See Paragraph 1.4 on page 14 of The Retail Market Review – Findings and initial proposals
9. See Note 21 on page 18 of The Retail Market Review – Findings and initial proposals.
10. See Paragraph 2.50 on page 30 of The Retail Market Review – Findings and initial proposals
11. See Table 1, The functioning of retail electricity markets for consumers in the European Union. 11 November 2010