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The big squeeze: Gas price rises are slowing down, but don’t expect lower bills

  • 14 Sep 2012, 11:30
  • Christian Hunt


Average consumer energy bills have remained largely unchanged over the past year, according to new figures from energy regulator Ofgem. But, as rising gas prices and the costs of upgrading the energy network, it's probably not going to last.

The figures show that some of the costs which make up the average household's £1310 combined gas and electricity bill have risen over the past year. Because of this, energy company profits have gone down. But they are likely to rise again as energy companies put up their prices, following the lead of SSE - which announced it would increase consumer energy prices by nine per cent from next month.

Gas price keep going up - but more slowly

Consumer bills keep going up, but not as fast as they have. The the wholesale cost of gas in the average consumer gas bill has gone up £25 over the last year, according to Ofgem. This is a slower rise compared to the previous year, when the amount the average household paid for gas rose by £80 - possibly due in part, however, to milder winter temperatures in 2011/2012.

What else makes up our energy bills?

Other costs - the costs of environmental policies and "extra costs covering meters (installation and maintenance), storing gas, balancing the electricity system and social programmes like the Warm Homes Discount" - went up by £15 between September 2011 and September 2012.

It's not clear - because Ofgem doesn't break it down - how much of this is due to green policy measures and how much to other issues. The most recent Ofgem assessment of how much environmental policies are contributing to energy bills was made this May - the regulator concluded that environmental costs comprised 4 per cent of an average gas bill and 10 per cent of an electricity bill, amounting to about £75. This doesn't include the costs of the European Emissions Trading Scheme, which probably amounts to another £20 or so, according to Department Energy and Climate Change figures from last year.

Power company profits fall, but probably not for long

According to Ofgem's calculations, the net margin for a power company - roughly indicative of the amount of profit it makes from an average customer - fell from £85 in September 2011 to a rolling average of £40 in September 2012. This rolling average figure is calculated over a year - the past six months, and the forthcoming six months.

Ofgem predicts that power company profits will rise in the short term, as bills rise again:

"We expect the snapshot margin to rise to around £65 over the next three months. This is largely a result of a change to the future retail bill (SSE announced it will increase its gas and electricity prices by an average of 9% on 15 October). However there are many uncertainties, not least continued changes in wholesale prices, which could affect this estimate of snapshot margin."

Many commentators think that other energy companies are going to follow SSE's lead in increasing bills, but uncertainty about whether power companies will raise bills, and how quickly, means that Ofgem doesn't make firmer predictions about the long term.

When SSE raised its customers' bills last month it laid the blame on the rising cost of using the energy networks, the rising price of wholesale gas, and the rising cost of environmental and social initiatives - particularly the energy efficiency measures known as the Carbon Emissions Reduction Target and the Warm Homes Discount.

Putting up prices also allows energy companies whose profits are being squeezed by rising prices to recover their profit margin.

Ofgem's assessments of bill costs are generally regarded as the most solid available. The figures demonstrate that the wholesale price of gas is continuing to put upward pressure on fuel bills. Likewise, to a lesser extent, changes being made to the energy system are also pushing bills up. Rising costs  squeeze power company profits, which will sooner or later inevitably lead to price rises for consumers.

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