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Cutting energy prices

Last updated on 11/05/2016

Why not now? If wholesale gas, oil and coal prices have already fallen, shouldn’t we be seeing lower domestic bills in January rather than having to wait until April when the winter will be over?

It looks like a good point but the fact is that one of the biggest reasons why tariffs haven’t fallen is because we have endorsed a system which prevents it.

Regulated energy companies are expected to set prices for longish periods - typically around a year. They can adjust them at shorter intervals but doing so is expensive because it involves everyone formally being notified of the change in advance. While the companies initially have to cover those communication costs, ultimately the consumer will be forced to pay them.

In any case it’s believed that consumers don’t want to see prices see sawing all the time. They want visibility on charges which requires the energy companies, which are exposed to fluctuations in wholesale market, to hedge. But the act of hedging or buying ahead commits the companies to paying prices which in a falling market may look high. They can only access the lower wholesale costs when their hedges expire. And that’s what’s happening now. Hedges are coming to an end.

But here’s an heretical thought. Why do we need to have what are effectively fixed prices? Your typical power bill comes to around £600 a year. About half of that relates to wholesale fuel costs. If those costs were to rise by twenty per cent which is a big jump, and the effect on bills to be immediate, you would face an increase in your monthly direct debit of about £5 or about £1 a week. Is that a price shock you couldn’t sustain.

Remember hedging doesn’t insulate you from rising costs. It just postpones the pain. If wholesale prices rise and a regulated energy company fails to recover its costs through existing charges, it just waits and retrieves the shortfall in the next tariff period. You can’t escape higher energy charges.

And here’s another thought. Annual bills for home heating oil will be far greater than yearly charges for power. If If households can cope with fluctuating costs for the former why not electricity users.

In my view hedging particularly in electricity brings you a benefit you don’t need at a cost you don’t want

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