Following a lengthy price freeze beginning in February, British Gas have shocked customers by announcing a 12.5% increase in electricity tariffs after accidentally publishing an unfinished report titled ‘Why we’ve had to raise electricity prices’. With gas prices remaining unchanged, this takes the average annual dual fuel bill up 7.3% to £1,120, and analysts warn the move could spark a new round of hikes from other suppliers.

British Gas owners Centrica have alternately blamed increased transmission costs, wholesale electricity price rises and renewable energy subsidies. So is this hike simply a response to market forces in line with competitors, as British Gas Director Mark Hodges said on Sky News – or are other factors likely to have played a part?

Increased costs and wholesale price rises

By some estimates, transmission costs are projected to increase in the coming years, but the insinuation from British Gas that wholesale electricity prices have risen since November 2013 is false. Data from ICIS, an industry leader in market intelligence, show that despite recent spikes, prices are still around 20% lower than their 2013 high, and less than half their peak in 2008. Centrica CEO Iain Conn later admitted that prices had gone down, but maintained that overall supplier costs had risen by 16% – an assertion disputed by consumer organisation ‘The Big Deal’, who cite Ofgem data suggesting costs have fallen by 9% in the last year.

Author’s analysis of wholesale electricity prices from 2012 onwards (Source – ICIS Power Index)

Green levies

Led by the Telegraph, many commentators are again attributing price increases to renewables subsidies, a reaction which Centrica were quick to co-opt. However, these reports and Centrica’s figures were swiftly challenged by thinktanks, demonstrating that they relied on distorted definitions and misrepresentations of the facts. While ‘green levies’ have increased energy bills by £100/year (around 9%), energy efficiency measures alone have cut bills by £290/year, and studies by the Committee on Climate Change have shown that policies to develop a cleaner energy system save consumers £20 for every £9 spent.

It is also worth noting that annual global subsidies for fossil fuels total $5.3 trillion compared to just $120 billion for renewables, according to the IMF. Britain exemplifies this mismatch, with the Conservatives handing over 100 times more money to fossil fuels than renewables since 2010. Britain is the only G7 nation to have increased fossil fuel subsidies, and despite a pledge to phase out use of highly-polluting coal, the industry still receives over 10 times as much as all renewables. This has particularly angered proponents of wind power, which has in fact been the cheapest source of new energy in Britain since 2015, and solar, which is now at least as cheap as all other sources.

Render of new nuclear power plant Hinkley Point C in Somerset. The project remains mired in controversy over financing, construction difficulties and electricity costs, which will be guaranteed at over double current market rate (Credit: BBC)

Consumer confusion

Consumers are beginning to heed ongoing Ofgem and consumer group campaigns to encourage tariff-switching, with almost 5m people changing suppliers last year. However, over 60% of consumers have never done so, with many paying hundreds of pounds over the cheapest available rates. Ofgem are currently consulting on overhauling complex switching procedures and protecting vulnerable customers – something that British Gas claims it is focusing on – but the average consumer could still do more to minimise their energy bills.

Profit margins

After registering a £2.2 billion profit in 2016, Centrica has been hit by milder temperatures and the loss of 377,000 British Gas customers this year, leading to operating profits of only £816 million by June 30 – a 4% decrease on the same period last year. It is certainly likely that Centrica would want to counteract this poor performance, and investors have responded positively to the price increase. However, with the large energy suppliers making around £3billion profit a year on average, the government is coming under renewed pressure to re-examine profits, particularly as similar companies in other industries – such as supermarkets – often survive on far less.

If one thing is clear, it is that the range of opaque facts and figures – and the infinite ways of interpreting them – make it extremely difficult to pin down whether a 12.5% electricity price hike is justifiable or not. Facilitating more transparency in the industry will be a long process, but consumers can be optimistic that digital technologies such as smart meters can begin to lift the veil on how to find and switch to the best available deal in future. However, whether this increase is defensible or not, the revival of the debate over energy prices will at least serve as another catalyst for increased public awareness of how to avoid similar shocks in the present.

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