Energy firms under pressure to pass on new low oil prices

November 18, 2008

Britain's energy suppliers came under intense pressure to knock billions of pounds off domestic fuel bills yesterday after the price of oil fell to a new two-year low.

With the price of oil on a steep downward trend, the Energy minister, Ed Miliband, urged chief executives of the big six companies to pass on the falls in wholesale prices to consumers coping with high food and petrol costs.

The price of oil hits fuel bills because it is linked to the price of gas the UK imports from the Continent to supply homes and to generate electricity.

One industry expert estimated that the companies could reduce energy bills by £3.5bn, about £150 for each of Britain's 24 million households.

The first round of cuts – expected to knock at least £100 off annual bills - is expected as soon as January but an energy commentator, Joe Malinowski, said political pressure could force it to be made quicker, with an outside chance of a cut before Christmas. Energy bills soared by 40 per cent in the first half of this year, with companies blaming the soaring price of oil.

Brent crude rose to a new high of $144 a barrel in July but fell back yesterday to hit $53 a barrel, its lowest since January 2007. Despite the 63 per cent cut, fuel bills have stayed high since the summer, averaging £1,292 for an annual dual-fuel deal.

The industry body, the Energy Retail Association, insisted the power companies would have to wait for a "sustained period" of low prices before passing them on to consumers, because they had entered long-term contracts when the oil price was high.

However, political pressure is building on them to act sooner as consumers struggle with rising household bills and massive job cuts – and the companies are claimed to be profiteering. A study by the Local Government Association in September found that, despite claims the companies had to pay for rising costs and greater investment in renewables, they increased dividends by £257m, or £75 per household, during 2007.

Yesterday, the Citizen's Advice Bureau said the number of fuel debt inquiries increased 13 per cent during 2007-08. Age Concern warned that 5.4 million Britons were in fuel poverty, meaning they spend more than 10 per cent of their income on fuel to heat their homes.

As pressure mounted on the companies, Mr Miliband called them into to see him at the Department for Energy and Climate Change to update him on plans to reduce bills. Also present at the meeting was Ed Mayo, the chief executive of Consumer Focus, who has accused the industry of having inadequate competition and artificially high bills.

Neither the Government nor the energy companies would comment in detail on what was said during the "private meeting". However a spokesman for the Department for Energy and Climate Change said the Government believed that bills could and should come down. "It's quite clear that we need to feed through to the price people are paying," he said.

In a statement last night, the department added: "The Government and the industry are agreed on the need to bring down retail gas and electricity prices." It added the suppliers would comply with the demands made recently by Ofgem.

A full-scale inquiry by the Competition Commission is hanging over the £24bn-a-year energy industry. Last month, Ofgem dismissed suggestions that the big six energy companies were colluding to increase prices but the regulator said they were giving a poor deal to four million electricity-only customers without access to dual fuel deals and many customers on pre-payment meters. It warned they faced a referral to the Competition Commission unless they responded favourably to a consultation on its findings.

The Conservatives increased the pressure yesterday by pledging to ban companies from charging unfair price premiums for pre-payment customers. The shadow Energy Secretary, Greg Clark, said companies would be required to offer social tariffs to all vulnerable households, as well as making it clear on bills whether customers were receiving the cheapest possible tariff.

Joe Malinowski, of the websiteenergyshop.com, said fuel bills would not fall as steeply as the oil price because they had fallen short of its extreme peak and the pound's weakness meant not all of the gains would come through. He did say, however, that the companies should make substantial cuts in household bills. "We are in a situation where we think companies should be in a position to pass on a 15 per cent cut in gas and a 5 to 10 per cent cut in electricity," he said.