Carbon Briefing: energy companies appear before the Energy and Climate Change Committee
Energy companies should expect a “serious duffing up” when they appear in front of the energy and climate change (ECC) committee tomorrow, according to the BBC.
The committee has called on energy suppliers to give evidence tomorrow afternoon following a series of price rise announcements. The committee says it wants to explore the “reasons and justification” behind the price rises, the difference pricing policies between energy suppliers, and how transparency around energy company profits can be improved.
The power companies have argued that price rises are caused by increases in ‘green’ levies, the rising wholesale price of energy and the increased price of transporting energy. In a report issued earlier this year, the ECC Committee concluded that the complexity of the energy market makes it difficult to work out if this is the whole story.
The committee said greater transparency is “urgently” needed to reassure consumers higher prices are not fuelling excess profits. With political and public interest in the cost of energy so high, the session promises to be high-profile and heated. Perhaps this is why only one company, E.ON, is sending its chief executive to tomorrow’s session.
So what will the ECC committee be hoping to interrogate?
Why are bills going up?
This is the big question. Energy companies have primarily laid the blame on increasing ‘green’ tariffs – government levies aimed at increasing take-up of renewable power and subsidising more home insulation.
Such levies account for about nine per cent of bills, according to government data. But there’s disagreement between government and the power companies. Some energy companies say they cost more, while the government says data it has released suggests energy efficiency measures shouldn’t be driving up bills by as much as the power companies claim.
The companies also say that bills are being driven up by the rising wholesale price of energy. On that front, data from energy regulator Ofgem will “prove awkward” for the energy companies at tomorrow’s session, according to the Financial Times. It shows wholesale costs currently account for £610 of an energy bill, just ten pounds more than last year, while energy companies have put their bills up by more than a hundred pounds each.
If the government measures and the wholesale price aren’t pushing up prices as much as the companies claim, there could be a gap in the numbers.
How much profit are energy companies making?
Another key question. Some commentators suspect that rises in bills are going towards the company profit margin. But it’s not easy to independently work out how much profit energy companies make.
The energy industry says companies tend to make about five per cent profit supplying energy to consumers. But the ‘big six’ also make money from generating and trading energy. In a previous report, the ECC Committee concluded that although energy companies made just over three per cent profit supplying energy to consumers in 2011, they made 24.4 per cent profit through energy generation.
It could all be a matter of perspective. Chris Newman of consultancy Parity Projects suggests costs that are directly passed on to the consumer – including wholesale costs, VAT, the cost of transporting energy and the ‘green’ levies – should all be excluded from any calculation of how much profits companies make from selling electricity or gas.
Using this approach, the companies make about 25 per cent profit on supplying gas and 16 per cent on supplying electricity:
Source: Parity Projects blog. The pi chart shows how an average electricity bill breaks down. Once all the costs passed on to the consumer are excluded from the calculation, company profits look like a much larger proportion of the whole
MPs may want to know how much profit energy companies think they should be making. Energy companies compare their profit margins with those of supermarkets – generally less than five per cent. But in 1998, energy companies made about half the profit per customer they made in 2008, according to Ofgem.
Is there enough competition in the energy market?
Just six big companies control 95 per cent of the energy market, and smaller companies find it hard to enter the market. This could means that competition may not be working effectively to drive down prices – certainly an issue the ECC Committee will want to investigate.
All six companies are expected to announce similar price rises this year – just as they did last year. Some commentators argue that only a full-scale overhaul of the whole system will ensure that consumers get a fairer deal.
Ofgem has looked at the market dominance of the big six in the past, and hasn’t found any evidence of price fixing between the companies.
But questions hover over Ofgem’s ability to regulate the market. The coalition government is going to review the energy market to see how effectively it is functioning, according to David Cameron last week. Opposition leader Ed Miliband, meanwhile, says Labour would abolish energy regulator Ofgem if it got into power, replacing it with a body with more powers.
Is the energy market sufficiently transparent?
Many of these issues come back to the need for more transparency. In its previous report, the ECC Committee said Ofgem had “failed consumers” by not taking all the steps necessary to ensure consumers bills made sense and gave an adequate sense of what people are paying for.
When price rises happen, the energy companies release breakdowns of why they believe bills are going up. But the numbers are often hard to interrogate and compare.
MPs presumably hope that by bringing the energy companies in to Parliament they can ask direct questions, and throw light on a confusing argument.