Ofgem To Raise Price Cap To £2,800 in October

NEW: Head of Ofgem says he will be writing to Rishi Sunak today to inform him the price cap is expected to be £2,800 in October, up from £1,971.

— Daniel Hewitt (@DanielHewittITV) May 24, 2022

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Ofgem Calls for Energy Investigation

Ofgem has stated that energy companies may be making excess profits and ripping off loyal customers. As such it has called for a full Competition and Markets Authority investigation that could result in the break-up of the Big Six (British Gas, SSE, Npower, EDF, Scottish Power and E. ON which control 95% of Britain's energy supply market).

Ofgem said that energy retail profits of Britain’s six largest energy suppliers had risen from £233M in 2009 to £1.1BN in 2012 “with no clear evidence of suppliers becoming more efficient in reducing their own costs”.

The Telegraph quotes Ofgem:

“Further evidence would be required to determine whether firms have had the opportunity to earn excess profits.” 

Ofgem also said that suppliers were “consistently setting higher prices for consumers who have not switched”, who are often the most vulnerable and least engaged customers, while offering cheaper deals to savvy consumers.

It found evidence of "possible tacit coordination reflected in the timing and size of price announcements", which "reduces competition and worsens outcomes for consumers" although it is not a breach of competition law.

Dermot Nolan, Ofgem chief executive, said:

“Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices."

An investigation is likely to begin in June and to last at least 18 months, potentially two years.In other words the long suffering consumer will have to endure at least two more years of high prices and lack of transparency.

Allegations of Gas Market Rigging Akin To LIBOR

The FSA and Ofgem are looking into allegations that some of the UK's largest utilities have manipulated the UK physical natural gas markets.

Seth Freedman, a whistleblower, told them that he saw evidence that wholesale gas prices, used as the basis for domestic energy bills, were manipulated by some of the big power companies.

Mr Freedman, who worked at ICIS Heren (a firm which reports gas prices), said he saw what he took to be suspect trading on September 28 (the end of the gas industry’s financial year).

The fact that gas is traded like all other commodities makes it susceptible to speculation.

In the event that Mr Freedman's allegations are proven to be true, then this would be a scandal equivalent to the LIBOR rigging by the banks.

You can almost hear the lawyers rubbing their hands with glee at the thought of the lawsuits that are going to come from this.

The Great Energy Rip Off

Energy companies regularly use rising wholesale prices as a justification for why they raise energy bills for customers.

However, the calculations by which the "justify" their price increases are utterly incomprehensible. As such OFGEM have hired forensic accountants to scrutinise the wholesale fuel prices paid by the "Big Six" energy companies.

Given that OFGEM can't understand the pricing structure of the energy industry, how are we poor saps (the end users) meant to understand it?

Q: Why do the energy companies make it so complicated?

A: RIP OFF!

Fuel Bills To Rocket by 40%

To add further fuel (bad pun isn't it?) to the rising inflation figures (3.3% or 4% depending on which you believe), energy companies are expected to raise their prices by up to 40% this year as a result of the trebling in wholesale gas prices (which are linked to oil prices).

The average UK energy bill is expected to rise from £1048 to £1467 in the next 7 months.

Consumers may be forgiven for thinking that Ofgem the energy regulator will step in to protect them. However, this is a false hope, MPs have accused Ofgem of being a toothless tiger that does not do enough to help consumers.

Lindsay Hoyle, Labour MP for Chorley, attacked Alistair Buchanan, Ofgem's chief executive. Mr Hoyle said that energy companies blamed poor planning laws for not building enough storage facilities to enable Britain to be self-sufficient. However, he said that it was in the companies' interests to maintain a shortage so as to increase their profits.

Mr Hoyle is quoted in The Times as asking Buchanan whether he was prepared to act now to address the issue, adding:

"Or are you the toothless tiger that we imagined?"

The next 12 months will be very tough for all in the UK. The government remains on the sidelines, a bemused observer wringing its hands.

Crime and Punishment

Following last week's announcement by npower of an average 17.2% increase for gas prices and an average rise of 12.7% for electricity, Ofgem (the energy regulator) has tried to damp down fears of increasing residential gas and electricity prices.

Ofgem, in a response to a letter from Chancellor Alistair Darling, said that market forces (ie customers being able to switch accounts) would ensure that the consumer would not suffer unduly.

Quote:

"In Britain's competitive market some energy suppliers will be better at buying their energy than others and will be able to price at an advantage to their competitors,' Ofgem said.

Over the last five years we seen this happen and companies with high prices have been punished severely by customers. With customers switching at record levels this is set to continue."

This is all very well. However, it assumes that other energy suppliers will not follow npower's lead. Npower disagrees, and said that it expects other suppliers to "follow suit very shortly".

Darling and the government will be sweating in their beds, fearful of the effect that such dramatic price rises will have on the voters' perceptions of the effectiveness of their handling of the economy.