‘I don’t know why energy companies invest in Britain,’ said a former energy minister to me a couple of weeks ago. He was referring to the lack of progress on shale exploration (more of which later), but he might easily have been talking about the politicisation of energy prices.
In case you haven’t heard, Ofgem, the energy regulator, has written to the Big Six energy firms to ask them to explain why the fall in wholesale prices over the past 12 months has not been passed on to the consumer. Another political row has broken out, with politicians on all sides claiming that the energy market is dysfunctional. They have cause to do so. Dermot Nolan, CEO of Ofgem, has added to that chorus by writing in his letter: ‘In a competitive market, I would expect the threat of losing market share to encourage suppliers to pass on sustained reductions in wholesale costs as savings to consumers as soon as possible.’
The regulator should not have had to write this letter; the companies ought to have been making the argument themselves for some time. It is a relatively simple argument to make. Wholesale prices make up 46% of consumers’ bills. Most energy providers buy wholesale gas and electricity months, often years, in advance in the ‘forward market’ to protect themselves (and ultimately the consumer) from price volatility. Volatility is an uncomfortable fact of life in the global energy market, a consequence of variable demand and other factors. Buying in advance means that the consumer doesn’t feel the effects of price fluctuations immediately, and gives companies time to develop pricing strategies in order to maximise value for consumers. Many energy companies have stabilised bills this year as a result of passing on to the consumer the cuts to green levies that were announced in last year’s autumn statement.