Utility Week

UTILITY Week 13th November 2015

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UTILITY WEEK | 13TH - 19TH NOVEMBER 2015 | 27 Customers Analysis I t's almost six months since Amber Rudd took her first stand against stubbornly high gas prices in an open letter to the big six. In June this year, the still-new energy and climate change secretary demanded tariff cuts to reflect lower wholesale prices, and the big six remained largely silent in response. At the time, suppliers had offered low single-digit reductions on gas bills, despite strong double-digit falls in the wholesale price of gas. Market prices had tumbled steadily from summer 2014 for almost a year, leading many to question how long custom- ers would have to wait for the firms' forward hedging positions to unwind and enable them to pass on the lower costs. Flash forward six months and little has changed. Wholesale costs have fallen fur- ther. And the political heat has continued to climb a degree or two as temperatures begin to dip. Ofgem chief executive Dermot Nolan has joined Rudd's call for lower prices and warned that in the context of the Competi- tion and Markets Authority's (CMA's) con- tinued investigation, the suppliers might be proving the case they are trying to defend. Still, suppliers remain tight-lipped on any potential gas price cuts for the coming win- ter. But with gas prices recently hitting five- year lows and the political glare increasing – can they afford to not to take action? The UK market stands in stark contrast to neighbouring France. There, domestic gas tariffs are still regulated by the govern- ment with monthly reviews to ensure that price levels respond as soon as possible to changing costs. By October, gas tariffs were as much as 8 per cent lower than in January, tracking falling wholesale prices, which are relatively consistent across European gas markets. When pressed by Utility Week, all six of the UK's largest suppliers held their tongue on future tariff moves. The UK's largest gas supplier, British Gas, declined to comment on future price cuts, but stands as the lone wolf of suppliers, hav- ing broadly kept pace with regulated French tariffs since January. The supplier cut dual- fuel bills by 5 per cent in late January and offered a gas price cut of 5 per cent in August. SSE tells Utility Week that it too has cut bills twice in the past 18 months, but declined to comment on further cuts for its domestic customers, while at the same time stressing that it expects its energy supply profits to fall this year. SSE was last to cut prices in the first quar- ter of this year, lagging its rivals by months to offer a 4.1 per cent reduction in April, and is understood to have purchased a large amount of wholesale energy before the com- modity crash in order to offer a price freeze pledge designed to see off the political threat of a Labour-led energy price cap. Other suppliers offered gas price cuts in the first few months of the year at 1.3-5.1 per cent, which critics claimed were "too little too late" (see box). "We constantly review prices, but it is very important to note that wholesale costs are not the only cost on customer bills," SSE says. Although not exclusively responsible for the end cost of gas, the wholesale price makes up around half of the average gas bill, so the dramatic, historic market lows should have a big impact on tariffs. The value of gas for delivery this win- ter was first traded in the wholesale market at around 81.45 pence per therm in 2011, but in June set a fresh record low of 47.4p/ th – almost half the level paid by companies that may have forward hedged a part of their portfolio. Looking ahead, gas prices for delivery in the next year are lower still. Market experts at Icis say that in the third quarter of 2015, gas for next year averaged its lowest for a quarter since 2010, at 43.095p/th. It's little surprise, then, that the French government can see room for lower tariffs, but – with the possible exception of British Gas – the UK's privately held UK suppliers seem unable or unwilling to defend their slow response. "Perhaps they are trying to prove the CMA right," Ofgem's Nolan writes. Suppliers have another six months to heed the persistent political warnings ahead of the CMA's final report – and customers will be hoping that they do. Suppliers resist calls for cuts Despite growing political pressure, most of the big six energy suppliers are still failing to pass on reductions in wholesale gas prices to consumers, says Jillian Ambrose. THE LATEST GAS SUPPLIER CUTS Supplier Cut Date of change British Gas 5% 27 August SSE 4.1% 30 April Eon 3.5% 13 January Scottish Power 4.8% 20 February Npower 5.1% 16 February EDF 1.3% 11 February GAS TARIFF BREAKDOWN BY COST Source:Ofgem Wholesale Network Social Operating VAT 51.59% 23.80% 3.67% 15.33% 5.43%

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