British Gas warns UK energy policy weighs heavily on bills

The cost of the UK government’s energy policies is now a bigger share of household electricity bills than wholesale prices, British Gas has said. 

This week, the company raised its electricity prices by 12.5 per cent for 3.1m homes, even though wholesale electricity prices have fallen over the past three years, complaining that it has been making a loss on selling electricity to homes.

In a breakdown of its costs, British Gas said that while the cost of wholesale electricity has fallen by 21 per cent since 2014, the cost of “government mandates and policy” has risen by 104 per cent, and the cost of transmission, distribution and metering has risen by 10 per cent. 

The government policies include several subsidy schemes for renewable energy to help meet the UK’s carbon emissions reduction targets, and the installation of digital smart meters in homes.

The debate over energy bills has seen the reopening of a debate over whether British households are being milked by large, profiteering companies, or whether ministers are being disingenuous about how much consumers are paying through their bills for social and “green” policies.

Centrica’s chief executive, Iain Conn, has suggested that the growing cost of the government’s energy policies should be passed on via general taxation, rather than through energy bills. 

Centrica said the cost of government policies has risen from £81 per customer in 2014 to £165 and is now 15 per cent of the standard tariff electricity and gas bill. The cost of wholesale energy has dropped to £134, or 12 per cent of the bill. 

The remainder of the bill is made up of taxes, a company’s operating costs and its profit margin. Last year, British Gas made a pre-tax profit margin of 7.18 per cent.

Centrica, which said ministers could be “little bit more open” with consumers about what costs are passed on via bills, is not alone in its arguments. Most of the other big suppliers that have increased energy prices this year have cited such compulsory “non-energy” costs as a cause for rising bills.

But the government continues to question why prices are increasing, and has previously said that independent reports show “energy policy costs make up a relatively small proportion of household energy bills.”

The clash between government and industry is only likely to intensify, since independent analysts expect non-energy costs to continue to rising, while politicians from all parties push for an end to “rip off” bills.

“If you are looking broadly over a 4-5 year period our view is you will probably see the same again go on the electric bill in terms of these policy costs,” said Robert Buckley, research director at Cornwall Insight, an energy consultancy. 

Critics of the big energy companies point out that while Centrica may have been making a loss on domestic electricity supply, its profit margin last year on gas provision was 15.1 per cent. 

British Gas has chosen to freeze gas prices in its latest price announcement but rivals point out it could have cut them to cushion the effect of the electricity rise. It also decided to scrap a £15 discount for customers who buy both gas and electricity, meaning that from mid-September — when the changes come into effect — an average “dual fuel” bill will rise by 7.3 per cent, or £76, to £1,120.

In most years since 2009, Centrica, the market leader, has had the highest pre-tax profit margin among the “big six” energy companies for the domestic supply of gas and electricity combined, according to data from Ofgem.

Another accusation often aimed at the biggest suppliers is they could cut their own costs to keep bills lower for their customers.

“They’re [the big suppliers] inefficient and outmoded — and its customers who pay the price,” Greg Jackson, founder of Octopus, a small, “challenger” energy company, said.

It is sometimes claimed that the UK has some of the highest energy costs in Europe. In fact, this is true only in relation to industrial electricity prices, where the UK has the third highest costs among 15 core EU countries, according to BEIS.

For households, UK electricity prices are the sixth cheapest among that group of 15 countries. Consumer gas prices are the second lowest. Analysts say in much of Europe, especially Germany, households have shouldered a greater share of the costs to transform energy systems, while industries have been more protected.

Ofgem is currently looking at measures to help UK households on the poorest energy tariffs and the government has warned it is “ruling nothing out” if the regulator’s actions are deemed insufficient. Before the general election, Theresa May, prime minister, promised to cut bills for 17m households, although Ofgem’s proposals so far fall well short of that, protecting only a further 2.2m “vulnerable” customers.

In the meantime, for those millions of households that are faced with a confusing rise in their energy bills there is only one course of action, according to consumer groups. “Customers concerned about their tariff should switch to a fixed price deal now,” advised Alex Neill of Which?

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