Looming energy bills throw spotlight on suppliers

Households across the country cranked up the heating to see off the UK's freezing spell but are set to pay the price as winter bills begin to hit the doormat.

Households across the country cranked up the heating to see off the UK's freezing spell but are set to pay the price as winter bills begin to hit the doormat.

The surge in demand for gas and electricity from the coldest January in 25 years - averaging 0.6C - will inflate bills and add to New Year blues for millions.

Although estimates vary, price comparison website energyhelpline.com said the cold snap could push the average January fuel bill up by almost 50 per cent to £227.

Meanwhile analysts forecast an £100 million profit boost for the UK's 'big six' suppliers this year - prompting accusations of profiteering from consumer groups.

But energy firms argue the profit spike is the result of higher usage rather than rising prices, with daily demand surpassing the previous record set in January 2003 according to network operator National Grid.

They add that energy costs have been slow to fall due to the price of stocks bought for this winter 18 months ago or longer, when wholesale costs were rocketing.

This has done little to soothe groups like Age Concern which warns pensioners will be hit with a "double whammy" of higher bills and inflation, which is set to rise sharply in the first half of this year.

The charity estimates 2.7 million UK pensioner households - one in three - live in fuel poverty. Older people meanwhile are more likely to rely on savings income squeezed by record low interest rates.

But in the aftermath of a deep recession with wage growth grinding to a halt, it is not just pensioners feeling the pain.

Figures from consumer group Consumer Focus show the average UK annual dual fuel bill for a customer paying by cash or cheque stood at £1,237 in January, based on normal levels of demand.

This is 4 per cent below the £1,290 peak seen 12 months earlier but still 32 per cent above the average dual fuel bill in January 2008.

Consumer Focus energy expert Andrew Hallett said: "By ignoring calls for overdue price cuts before the winter, energy suppliers have set themselves up to rake in profits hand over fist during the cold weather.

"Meanwhile millions of customers will be left wondering how to afford the expensive bills."

Hallett called for a Competition Commission investigation to address the market failings, adding: "The energy sector has clear problems and firms continue to fail to do the right thing by their customers and cut prices."

An investigation into the sector is unlikely so soon after industry regulator Ofgem's seven-month probe into the retail energy market in 2008, which said the market "works well for most" and found no evidence of cartel activity.

Ofgem has instead introduced tougher rules on marketing practices such as doorstep selling, as well as obliging suppliers to give clearer information on energy bills.

While this month's bills will be painful, energy companies insist prices remain high due to the practice of hedging future costs in buying wholesale gas to smooth out customer bills.

Higher profits this year will offset the hit taken in early 2008 - when firms waited before passing on big rises in wholesale costs. Bigger household profits are meanwhile offset by the lower gas prices impacting returns from production businesses.

Analysts expect the cold snap to add around £20 million to consensus forecasts for British Gas owner Centrica's residential profits for 2009, pushing them up to £560 million from £379 million the previous year.

But arguments calling for an immediate slashing of bills based on current wholesale prices are misguided, according to a spokesman for British Gas, the UK's largest supplier with 15.7 million customer accounts.

The 'spot' or immediate price of wholesale gas may be around the 40p a therm mark at the moment, but most of the gas for this winter will have been bought in forward markets nearly two years ago at above £1 a therm.

This was when oil prices were on their way to a record 147 dollars a barrel and some commentators - notably at investment bank Goldman Sachs - said prices could even hit 200 dollars a barrel.

Centrica's margins will be boosted by the extra gas it buys at lower spot prices to meet demand in the cold snap, but the spokesman adds that "a tiny proportion" of is actually bought on the spot market.

And while oil and gas prices have since collapsed as the recession and financial crisis took hold, the effect of the price hedging is still working its way through the system.

Hedging is not unique to the energy industry - most companies reliant on a potentially volatile fuel price such as bus companies and airlines look to do it, while others hedge against uncertain factors like exchange rates.

The more unpalatable alternative is prices swinging around daily in the spot market and energy suppliers changing their tariffs every week, hitting households and making business planning all but impossible.

Meanwhile Ofgem says the UK could have to spend £200 billion to secure supply and meet environmental targets to tackle a looming shortfall from soon-to-expire power stations. Energy firms have to make some sort of return to fund the huge investment in prospect.

Under the regulator's worst-case scenario - a strong global recovery and missed renewable and carbon targets - consumer bills could peak at more than 60 per cent higher by 2016 or £2,000 a year before falling back.

Sticky retail energy prices over the past year have been a factor in keeping inflation higher than Bank of England rate-setters have forecast, but in the meantime, the key question for households is when - if at all - are bills likely to come down.

Nick Campbell, an energy analyst at consultant Inenco, says forward gas prices for next winter are easing, meaning "scope for savings further down the line" as the impact of previous hedging is worked through.

But he warns: "It is important to note that the commodity price makes up roughly 55-65 per cent of the total unit rate - transportation and distribution costs, tax and other variables also account for the final unit rate.

"So any saving on the wholesale market could be neutralised by an increase in transportation and distribution as we attempt to modernise our antiquated grid system in order to cope with new plant builds."

For families suffering from harsh winters and high bills for the second winter in a row, the relief can not come soon enough.

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