Energy Guides

Why are energy prices going down?

Thursday 19 January, 2012

By Martin Fagan

Within a week, the “big six” energy supply giants all dropped either their gas or electricity prices by around 5%. So why have these price cuts happened and who will they benefit? How does it affect people on fixed price tariffs? We take a look.

After a year when energy prices appeared to be on an inexorable rise to the point of being utterly unaffordable for anyone other than premier League footballers, on 11 January EDF energy shocked consumers by announcing it would cut its gas prices by 5%, effective 7 February.

Before the energy commentators had time to digest the news, the following day British Gas said it would cut its electricity prices by 5% and several hours later, in the fastest succession of price changes on record, SSE said it would cut its unit price for household gas by 4.5% from 26 March 2012.

As three of the “big six” had cut prices, the pressure was on for the other three to follow suit. The wait wasn’t long: on Friday 13 January, Npower cut gas prices by 5% from 1 February. After having the weekend to mull it over, by the following Tuesday E.ON had dropped its standard electricity rate by 6% and Scottish Power cut gas prices by 5%, both companies’ cuts effective from 27 February.

Why did the “big six” cut prices?

A little-reported fact was that almost a week before the first of the “big six” announced price cuts, the niche energy supplier Ovo Energy announced a 5% reduction in prices. And that wasn’t all. Last November, after earlier announcing it would raise prices by 6.2% effective from January 2012, Ovo said it was cancelling the price increase due to a drop in wholesale energy costs.

The fall of wholesale gas prices is the key driver behind the recent price cuts of the six major UK energy firms. That and a bit of pressure from various consumer watchdogs - Consumer Focus and Which? - who pointed out that if a tiny energy provider like Ovo Energy could cut both gas and electricity prices on top of postponing a previously announced increase, then the “big six” - with their enormous buying power in the energy markets - could surely follow its lead.

The giant energy companies seem to have done so grudgingly, as none of the “big six” has really followed Ovo’s lead and cut both gas and electricity prices (EDF Energy, SSE, Npower and Scottish Power have cut gas prices; British Gas and E.ON have cut electricity prices).

Suppliers blamed rising wholesale gas prices for the winter 2010 increases but, as wholesale costs fell dramatically after March 2011 and retail prices were further hiked in summer 2011, the “big six” have faced mounting pressure to pass savings on to consumers.

Many energy industry commentators and analysts have said the price reductions are merely a gesture to keep the energy industry regulator Ofgem happy, with the more pessimistic commentators saying prices will inevitably rise rather that fall further. In January 2012 - just as the energy suppliers were trimming their prices - the Parliamentary Public Accounts Committee (PAC) of MPs issued a report, part of which said there was no evidence to suggest that when wholesale energy prices fell, energy companies cut consumer prices accordingly.

So who will benefit from these price cuts?

The recent round of price cuts will mainly benefit consumers who are on their supplier’s standard tariffs, which tend to move up (and now down) to reflect the price fluctuations in the wholesale energy market.

Although it’s difficult to predict with any degree of accuracy the precise saving each individual will make, calculated on the “average medium” level of energy consumption (3,300 kWh of electricity and 16,500 kWh of gas a year), independent switching service uSwitch.com says the recent round of price cuts will shave £34 or 2.6% off the average household energy bill.

How will affect people on fixed tariffs?

In the summer of 2011, in the wake of events such as the Japanese tsunami that put nuclear reactors out of action and the unrest of the “Arab Spring” in the Middle East, many energy consumers looked at the impending price rises from the “big six” and opted for a fixed-rate deal, securing the price of their energy for a set period.

However, those who fixed their prices last summer are locked into them until the set period ends so won’t benefit from reductions their energy supplier. This may not be a problem as the discount you signed up for last summer may still be a better deal than your supplier’s newly reduced standard tariff.

However, if the price reduction means you’re on a worse deal, read the small print and see how much it will cost you to get out of your current contract onto the reduced standard tariff and evaluate if the price you pay is less than the money you could potentially save.

Will the energy price cuts make a difference to you?

The single digit price reductions for a single fuel type (depending which type your supplier reduced) this January goes little way to offset the double digit rises at the end of 2010 and over the summer of 2011. According to uSwitch.com, the two rounds of price rises since the end of 2010 added a total of £2.24 billion onto the UK’s collective energy bills - this year’s price cuts will trim £340 million off that.

On an individual household level, for the energy consumption of the average home, uSwitch.com says energy prices increased by £224 or 21% in just over a year, but price cuts this year amount to £34 or 2.6%. On average, the reductions are the equivalent of deducting 15% from last year’s price hikes.

Will switching energy supplier get me a better deal?

Although this round of price changes movement has been downwards, history shows us that energy prices rise far more often that they fall. For example, in January 2006 the average household energy bill was £660 a year. Once the all price cuts come into effect, the average household energy bill will be £1,259 - an increase of 91% in seven years, says uSwitch.com.

Just as you want your mortgage rate to be the cheapest and your savings rate to be the highest, you also want to source your energy from the cheapest supplier. As energy bills take up a growing proportion of household expenditure it’s prudent to regularly check the market for a better deal.

For more information on finding the cheapest energy supplier and switching to them, read our guide on the subject.

When hunting for a new energy deal, dig out all your bills from the previous 12 months so you can accurately gauge your annual usage and therefore get a more accurate quote on which to base your decision to switch and which supplier’s deal best suits your circumstances.