Reaping from the benefits of a Canadian province almost entirely generated by affordable hydro, I am fortunate enough to be living with acceptable electricity costs. However the same cannot be said about other nations, particularly in the UK. With the market domination of the ‘Big Six’ energy giants, the British have been experiencing a roller coaster ride when it comes to gas and power prices. This ride, though it has its rises and falls, seems to head in one consistent direction – uphill. But, things may be starting to look brighter for the British with the recent announcement regarding simplified gas and electricity tariffs, to be enforced beginning 2014.
UK Energy Industry Trends
Prices have soared in recent years with predictions of further increase from 5-10%, if current trends continue, with expected doubling by 2020. (Express) As you can see in Figure 1 below, the graph (generated in ZEMA) shows the upward trend in power prices over the past two years. The question is, could this latest reform ease the price increases?
While there are various reasons that could explain the soaring prices, the nation’s power supply shortage could be a major factor.
“Britain’s energy industry is facing an unprecedented challenge to secure supplies,” said Ofgem chief executive Andrew Wright. The shortage could be based on a number of reasons according to Ofgem, “The global financial crisis, tough emissions targets, the UK’s increasing dependency on gas imports, and the closure of ageing power stations.”
Another reason for soaring prices is the government’s continued investment in renewable energy, mostly to attain its carbon emission goals (Express).
New Reforms Beginning 2014
The energy retail market in the UK is currently dominated by the Big Six, charging customers with continuously increasing prices (The Guardian). Collective profits of the Big Six have reportedly increased by 74% since 2009 (Metro).
Last year, UK Prime Minister David Cameron pledged to parliament “that energy companies have to give the lowest tariff to their customers.” Although the industry was caught off guard by the unexpected announcement, the Prime Minister has kept his promise (Financial Times). Last month, industry regulator Ofgem announced, “All UK households will receive simplified gas and electricity tariffs by the end of the year and must be told the cheapest deal available from their supplier by the spring” (The Guardian). Energy suppliers will be limited to offering four different tariffs.
This will be enforced in an effort to increase transparency, simplify pricing, increase trust, and reduce uncertainty for customers.
Tariff Reform Backfire?
Days after the reform announcement, many began to question whether the reform was even heading in the right direction. In one case, 175,000 household customers will be moved to new tariffs that are considerably more expensive in order for one electricity supplier to comply with the latest reform, according to Energy Live News. Others claim that Ofgem needs to do more to help consumers, such as reducing other costs like “fixed charges that are applied on a daily basis” (Telegraph).
With the tariff reform effective 2014, it will be interesting to see how the reform will further develop between the Big Six, the government, and ultimately the price customers will pay for their utilities.
Follow up-to-the-minute daily updates on UK energy trends, including power prices, with the ZEMA Suite, a data enterprise and management software solution. For more information on ZEMA, contact us for a free demonstration.