Ofgem investigates whether energy companies are ripping us off

Energy companies say wholesale prices rises are forcing them to raise their tariffs. But it turns out their profit margins are edging up, too. Should Ofgem put its foot down?

by Emma Haslett
Last Updated: 24 Feb 2011
With consumers feeling the financial squeeze, it’s no surprise energy companies’  recent price hikes have attracted lots of attention. They put the prices rises down to higher wholesale energy costs – but it turns out their profit margins are creeping up nicely, too, rising from an average of £65 per user in September to £90 per user now. That’s a jump of 38% - big enough to persuade energy regulator Ofgem to launch an investigation into the matter. You can’t exactly blame companies for wanting to boost their bottom line. But have they gone too far this time? 

Scottish Power, Scottish and Southern Energy and British Gas have all announced price rises in the last few weeks, blaming the rising cost of wholesale energy, which has risen more than 25%. And customers are going to feel the pain: the latest announcement, by Scottish Power, will push up prices by an average of 2% for gas customers and 9% for electricity customers, adding £54 a year to dual tariff customers. When it announced its rise, Scottish and Southern implied it had reached breaking point: ‘Having absorbed losses in our gas supply business for some time, we cannot delay an increase in retail prices any longer’ said one of its managers. You can almost hear the violins…

All of these businesses are answerable to their shareholders. And shareholders like bigger profits. Equally, energy firms have always used rising fuel prices to push up prices, so it’s nothing new. But the problem customers tend to have is that while they’re always quick to push up prices when wholesale prices rise, they don't show the same alacrity when prices start to fall again. 

With consumers up in arms ahead of a chilly winter, it’s not surprising that Ofgem feels compelled to stick its oar in. Although if the investigation is anything like a similar one in 2008, the watchdog’s bark may be worse than its eventual bite: back then, it didn’t find any untoward dealing and let energy companies carry on as they were.

According to one analyst, the problem is less about anything as untoward as price-fixing, and more to do with how the industry is structured. According to Adam Scorer from Consumer Focus, the fact that so many large companies are so dominant in the market prevents new entrants from charging competitive prices. ‘They do not feel the hot breath of competition on their necks’, he http://www.bbc.co.uk/news/business-11842686 told the BBC. So the standard slap on the wrist that often results from these kinds of investigations might not be enough to change things.

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