Ofgem has revealed that the big six utility companies are making £125 a year out of each of their dual fuel customers. This figure has risen by 733% in just four months.
The energy regulator put simple tariffs and clearer bills at the centre of proposals for “radical reform” of the energy market this morning as it warned a lack of transparency is stifling competition in the market, apparently underlined by a profit margin that has risen from 1.3% on the average bill in June to 9% in October, following a wave of tariff increases.
Ofgem said its plans would make it easier for consumers – currently faced with more than 400 tariffs to choose from – to compare prices. The watchdog will set a fixed standing charge on top of which the companies will have to offer a variable price per unit, making bills clearer and price comparison easier. This means there will be no complicating factors such as discounts, with the only changeable element on a bill the price per unit of gas or electricity.
“So the lower the price the smaller the bill – with no exceptions,” Ofgem said.
The regulator also revealed that the average household energy bill now stands at £1,345 a year on a rolling 12-month average, compared with £1,170 in June. In news that will outrage consumer groups who have long argued that energy companies make too much money from cash-strapped customers, Ofgem also revealed that over the same period, the net margin for a typical standard tariff dual fuel customer has risen from £15 a year, as measured in June, to £125 in October.
Yesterday, an undercover investigation by consumer body Which?revealed that the number of energy tariffs available to householders is so vast, and the options so complex, that staff at energy companies have no idea which is the best deal.
Which? called each of the six major energy suppliers 12 times in a week to get advice on the cheapest deal. Despite being asked clearly for the lowest cost option in each case, in nearly a third of the calls the firms failed to offer their cheapest tariff. Staff also gave questionable advice about potential savings, cashback deals and fixed prices.
Alistair Buchanan, Ofgem’s chief executive, said a looming £200bn investment drive to green the UK’s energy supply would only put further pressure on bills, adding further momentum to the need for reform.
“When consumers face energy bills at around £1,345 they must have complete confidence that this price is set by companies competing in a fully competitive market. At the moment that is not the case,” he said.
“That is why a radical break with the past is needed. Ofgem’s tariff reforms offer the quickest way to create a market where consumers can have confidence that prices are set by effective competition. Suppliers have told Ofgem they want to restore confidence in the industry and now they have the chance to do so.”
Prices have risen sharply in recent months, leading to warnings of rising “fuel poverty” – defined as any household that spends 10% of median income on electricity or gas – amid sub-inflation wage growth and a faltering economic recovery.
Last week, the government announced an industry-funded Warm Home Discount scheme, which offers a £120 rebate off the bills of those considered most vulnerable this winter.
One of the big six firms, Scottish and Southern Energy, reacted to the political furore this week by announcing it would auction all the electricity that it produces on the day-ahead market, breaking a convention that has previously seen all the big utilities generate and distribute their power, known as combining “upstream and downstream” activities, another bugbear for critics.
Ofgem said the simplification of tariffs was the “first of four waves of reform” which would include plans due in November to help business users, and in December decisions on proposals “to break the stranglehold of the big six in the wholesale electricity market”.
Britain’s energy minister Chris Huhne last month pledged “to get tough with the big six energy companies”, while earlier this year Ofgem threatened energy companies with a formal referral to the Competition Commission if they didn’t transform their prices and stop confusing customers. It said consumers were being “bamboozled” with the number of different energy tariffs now available. Ed Miliband, the Labour Party leader, has pledged to abolish a “rigged” energy market that has allowed the companies to achieve market “dominance”.