Coronavirus: Increase in energy prices beggars belief

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PREMIUM

LAST week’s decision by energy regulator Ofgem to raise the cap on prices payable for electricity and gas was a baffling move that raised fresh questions about the effectiveness of the regime it supervises.

Ofgem said the annual cap on the bills paid by customers on flexible tariffs would be increased by an inflation-busting 9.2 per cent, £96, to £1,138 from April 1 representing a return to pre-pandemic levels.

The main justification for the move was that wholesale energy prices had risen in recent months following a recovery in demand. As the cap was reduced by £84 after wholesale prices fell in response to the first wave of coronavirus infections, it was only fair that energy firms should be compensated when they rose.

If consumers on flexible tariffs didn’t like it, suggested Ofgem, they should just find themselves a better deal. Fixed price contracts are available.

“Energy bill increases are never welcome, especially as many households are struggling with the impact of the pandemic. We have carefully scrutinised these changes to ensure that customers only pay a fair price for their energy,” said Ofgem chief executive Jonathan Brearley

He insisted: “The price cap offers a safety net against poor pricing practices, saving customers up to £100 a year, but if they want to avoid the increase in April they should shop around for a cheaper deal.”

Nonetheless, Mr Brearley apparently felt obliged to note: “During this exceptional time I expect suppliers to set their prices competitively, treat all customers fairly and ensure that any household in financial distress is given access to the support they need.”

Industry body Energy UK said the increase in the cap reflected the fact that the wholesale cost of energy had risen significantly over the last few months. The implication seemed to be that it was only fair that suppliers should be compensated so that they could maintain profitability.

Energy UK also noted that the rise included an additional £23 allowance to help suppliers cover the cost of increases in bad debts. These have increased during the pandemic.

The pronouncements by Ofgem and Energy UK have a distinct air of self-satisfaction about them. Both sides appear happy that the brave and still relatively new world of competition, which was ushered in following the privatisation process that started in 1989, is working well.

Others think the decision to increase the cap showed the needs of energy suppliers were being prioritised at the expense of vulnerable consumers.

Ofgem’s exhortation to people to shop around assumes that everybody has the ability and time to do so. The huge challenges resulting from the move to home-schooling during coronavirus lockdowns have made clear that not all households are equal when it comes to things like access to the internet.

The price increase will take effect 30 days before the coronavirus furlough programme is expected to end. This is likely to be followed by a huge rise in unemployment.

Many people who remain in work have seen their incomes fall during the pandemic.

For those who are in low-paid work or struggling to manage on benefits any increase in bills, however small, could be the straw that broke the camel’s back.

Increasing bills to help firms recover the cost of bad debts may only mean that more people end up struggling to pay their bills.

Big energy firms such as ScottishPower were vocal in their opposition to the introduction of the cap in 2018. They said it would represent a disincentive to people shopping around.

The entry of lots of independents into the market fuelled hopes competition would deliver big benefits for consumers. However, their ranks are being thinned at pace. Smaller players may lack the financial muscle required to cope with market volatility. Ironically, some could struggle to afford the regulatory costs that are involved in the energy supply business.

On January 27 Ofgem said Green Network Energy and Simplicity Energy were ceasing to trade. In December it said Yorkshire Energy was ceasing to trade.

Ofgem appointed EDF, British Gas and Scottish Power respectively to take on the customers of the three firms concerned. This resulted in the three giants gaining almost 500,000 customers between them in total.

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