Temperatures are about to plummet and energy bills soar with gas and electricity bosses claiming further rises are unavoidable. Are the price rises really inevitable? Polly Curtis, with your help, finds out. Get in touch below the line, email your views to polly.curtis@guardian.co.uk or tweet @pollycurtis.
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The question
Analysis
Summary
Gas prices alone have gone up by 18% in recent months and on Friday the energy regulator Ofgem reported that energy companies' annual profit for combined gas and electricity customers has gone up from an average of �10 a year in June to �125 a year now. The prime minister and energy secretary Chris Huhne are meeting consumer and energy groups this afternoon for a summit on how to help people struggling with their household bills.
But this morning, Phil Bentley, the managing director of British Gas, the UK's biggest domestic energy supplier, said that price hikes are "inevitable". He told the BBC's Today programme:
We are importing 50% of the gas that comes into Britain and we are having to compete for sources from the Middle East - Japan is importing huge amounts of gas on ships and that was gas that used to come into the UK market. It is an inconvenient truth that unit prices of energy are going to go up. In my opinion unit prices will only go one way unless someone discovers huge amounts of gas and imports it into the UK: the international price for gas I am afraid is going up.
Huhne appeared to accept the firms' analysis that wholesale markets are out of their control, arguing that the market needed to be sharper in order for customers to get a better deal. He told the BBC:
These companies are not the Salvation Army, they are trying to make profits for their share-holders, and that's important that we in the Government work with Ofgem to make sure that these are genuinely fair and competitive markets.
The question
Are energy price hikes really inevitable?
I'm going to look at the pressures on the energy markets. Are price increases unstoppable? What's contributing to them? What's going wrong with the energy market? What impact will the green agenda have? And were the remarkable rises this summer unavoidable? Do you have any information or views that might help establish the facts of the energy market? Email your views to polly.curtis@guardian.co.uk or tweet @pollycurtis or join the debate below the line.
Analysis
Ofgem's report on Friday concluded that there had been dramatic rises in household bills in the past few months with the company's profits soaring from �10 per household to �125 on average a year for dual gas and electricity customers. The companies disputed the figures claiming that such a "snapshot" was an unfair portrayal ? in other periods they had made no profits or even losses and that price hikes were down to wholesale increases. The main Ofgem figures are here:
The industry responded via Energy UK with this report, which it said showed that in fact the companies are under pressure from the international commodity market price rises. It concluded:
As of 21 September 2011, energy suppliers were earning an average annual margin of about �26 per electricity-only customer, �55 per gas-only customer and �59 per dual fuel customer. These margins correspond to 4%, 8% and 5% of the respective average annual bills. For gas- only and dual fuel customers, these results end a long period of negative margins. Due to rising wholesale prices, we expect the annual energy cost faced by suppliers to rise over the next three months by approximately �10 for electricity-only, �24 for gas-only and �35 for dual fuel customers. Holding bills constant, rising wholesale prices would reduce average margins on each type of customer to 3%, 5% and 2% respectively. Energy prices remain volatile and margins may change quickly.
I've just been speaking with some of the consumer groups, asking them whether they believe that price hikes are inevitable. Richard Lloyd, executive director of Which? said:
It's not inevitable that we get hit by this sort of scale price rises. Yes wholesale market will go up, the green agenda has an effect but the 20% rises we've seen ? a doubling over the past five years ? is not inevitable. All the biggest suppliers put up their gas by 18% within a matter of weeks. What we know is that 75% of consumers sit on standard cheapest tariffs, there are savings consumers could make by switching. There also seems to be something wrong when all the suppliers can put up their prices at precisely the same time and amount.
There's something broken about the market. The gas market is volatile, it goes up and down. Yes it was likely that prices go up this year, but they will also come down again in the future. When wholesale prices go up they pass it on, when it comes down, they are slow to pass those savings through. What consumers feel is that the companies are using the wholesale market to hit them harder.
Adam Scorer of Consumer Focus said there are two elements driving the price rises: the commodity markets and the green investment agenda.
There's no great ray of sunshine on the horizon. There's nothing to suggest that we'll have something happen to drive down the price of energy. But I don't think we should be softening people up for hikes. The truth is the reason why reforming the market is so important is that the costs are going to high for the forseeable future. Chris Huhne's energy green deal will put prices up, but bills can be static because people will work harder to save energy.No one ? not even Phil Bentley - has a crystal ball. The effects of the Japanese earthquake, the Arab spring, they will receded. It's only in the interest of the suppliers to say the only way is up. But the reality is consumers shouldn't be waiting for bolt from blue to bring prices down. It is a lazy complacent market... that's why reform is absolutely so essential. Reform won't necessarily lead to cheaper prices, but it will lead to fairer prices.
Friday's Ofgem report included this interesting pie chart breaking down a customer's bill by the different elements in it. This shows that the biggest chunk is the cost of energy on the commodity market.
A point being made to me by Richard Lloyd and others is that there is practically a false distinction being made between the retailers and the wholesalers, who are regularly part of the same chain of companies. Centrica supplies gas to British Gas, which it also owns. @ThermoStat makes the point below the line:
I think the energy firms are playing a trick here, since they are the same companies that make large profits selling into the wholesale market, and then use the high prices their to excuse having to increase their prices on the retail side. They've made massive profits since being privatised by Major, and have not invested enough over the same period in renewing our energy infrastructure. This is privatising the profits and nationalising the losses, all over again.
I've just been speaking with Tim Yeo, the chair of the energy and climate change committee in Parliament, who has been an outspoken critic of the energy firms on this subject. He made the point about "vertical integration" - the phenomena whereby many of the retailers are co-owned by wholesalers in the energy market - and said:
In the long term there will be an upturn un world energy uses and prices. But I don't think this summer's increases were inevitable. The market is less than competitive, dominated by the big six. It's almost impossible for anyone else to enter it. There is a confusing array of tariffs which makes it very hard for consumers to make choices. There is no real market and not enough transparency in the wholesale market. At least sometimes prices are higher than they should be.
I think they have more wriggle room than they will admit. It is true that low carbon energy for the most parts costs more than just burning the coal. But we have to do it if we are remotely serious about tackling climate change. If we put a bit more on nuclear a bit more on some of the new technologies such as waste technology, if we did on shore wind rather than off shore, we'd find the rise would be smaller. The green measures cost around 5% of the costs.
The costs of green technology, he explains, are the costs of government rules which dictate energy firms have to buy increasing amounts of their energy from green wholesalers. The additional costs of this is passed onto consumers. This is how some are blaming the green agenda for increasing bills. You can see from the Ofcom pie-chart above that around 6% of bills are made up of these costs ? though I've heard figures ranging from 5-10% today. I'm going to examine the impact of the green agenda next.
Ofgem say that around 6% of household bills relate to the government's green policies and as Tim Yeo explained for us the main mechanism is that companies have targets to meet to provide more of their energy from green source, which is currently more expensive, and the costs are passed on to consumers. One Ofgem report on the future sources of energy suggested this could cost the industry �200bn by 2020 in converting power stations to green sources. There have been a run of stories suggesting that this is increasingly a cause of fuel poverty, including this one from the Daily Mail last week.
I've just been speaking with Paul Steedman of Friends of the Earth about the costs of the green policies. He agrees with Ofgem's analysis that it amounts to 6% of the household bill but adds more details about how the costs are generated. Other elements include:
? The policies requiring energy companies pay for home insulation schemes, the cost of which are passed on to consumers generally.
? The costs of EU emission trading schemes.
? The cost of "feed-in" tariffs to buy up energy produced domestically.
? The renewable obligation. Currently around 10% of energy comes from renewable sources.
Friends of the Earth today published this report (pdf) which makes the argument that actually if money is invested in reforming our energy supplies and improving consumer use such as through insulation, even if the unit price of gas and electricity goes up, bills could in fact fall. Stephenson pointed me towards the Committee on Climate Change, the government's independent advisors, and their conclusion on this.
This table, compiled in the committee's renewable energy report (pdf) from May this year, concludes that moving to renewable energy and improving energy efficiency could in fact save consumers money. The average household combined energy bill is estimated to reach �1,360 by 2020. If there was a move to renewable sources in isolation the cost would be �1,430, but combined with improved energy efficiency it would be �1,230.
Chris Huhne repeated his argument on the radio this morning that moving away from fossil fuels at a time when increasingly it is coming from overseas will actually help in terms of improving stability of commodity prices. However, Richard Lloyd of Which? also made this point:
We accept the argument that de-carbonisation will take out some of the volatility in the market. We agree that de-carbonisation is the right thing to do. We question whether the pace and the implications for affordability is being done right. Consumers don't believe they are getting a fair deal. The government's got a job to do to sell this to consumers. If you buy power in the States your bills tell you precisely what you're paying for. More transparency and honesty from everyone would be a good start.
This is the most striking set of figures I've seen. This graph documents the price changes at the big six suppliers for an average dual customer paying by direct debit over the last seven years. It's quite breath-taking how tightly they mirror each other, and how in the last two to three years the variability has reduced. I think it demonstrates a total lack of competition in the market.
The problem Huhne was highlighting today is that some 85% of customers never switch their provider, meaning the companies are not really held to account for their actions. On Friday Ofgem called for a simplification of the tariffs available, to make it easier for people to understand the deals on offer and improve the competition in the market. The other area where the government is putting pressure is by making wholesalers sell more energy on the open market, instead of to their own retailers, in order to allow new providers to enter the market and improve competition.
Friends of the Earth are also making the point about the scale of the Big Six energy companies' profits quite entertainingly in this film:
Their report, the Dirty Half Dozen, makes the point that at the same time as bills are going up for consumers, some of these companies have been reporting record profits. They say that in 2008 the collective profit of the Big Six companies was around �6.6bn, in 2009 it was �8.2bn and 2010 �8.5bn. Not on of the bosses of the Big Six earn less than �1m in basic salary.
Summary
Thanks for all your comments today, here and on our news story. These are some of the possible conclusions we can reach:
? Over the long-term it is very likely that the unit costs of energy will rise as resources become scarcer, the UK becomes more dependent on imports and there is a bigger shift towards green energy policies.
? However, there is little evidence that the recent dramatic hikes ? 18% increases for gas alone ? are justified and it comes amid record profits at the big six energy firms. Companies have been quick to pass on costs of temporary increases on the commodities markets ? for example as a result of the Arab spring or the Japanese earthquake ? but less quick to cut bills when the price of oil and gas decrease.
? The wholesale price of oil and gas is the biggest factor affecting prices. The wholesale price makes up 45% of a household's bill compared with just 6% which is the result of green policies. Energy providers blame the wholesalers' prices but that can be misleading; they are often one and the same corporation.
? Just because the unit cost of energy is likely to increase, that does not mean that household bill needs to escalate dramatically and if energy efficiency improves and the market becomes more competitive, costs could ever reduce. Moving to renewable sources could also protect against market volatility that fossil fuels are vulnerable to ? let alone the climate change and environmental implications.
? There is very little competition in the energy market with the vast majority of households sticking with one provider through thick and thin, partly because it is so difficult and complicated to switch providers.
Recommend from the comments below looking at @alastairharper who linked to the government's stats comparing our energy bills with other countries - actually we have among the lowest bills in Europe. @Rachelthedigger makes the point that it's all very well being told to improve the energy efficiency of your home, but if you don't own a home it's very difficult to get your landlord to.
Many thanks for all your comments and emails.
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