The average consumer in the United Kingdom often finds it difficult to get what they want when it comes to electricity. Electricity prices in the United Kingdom are rising, despite the assurances provided by the government that the prices are likely to fall. However, given the rates of inflation and current company policies, each year sees a significant price increase on our energy bills. However, the problems of the consumers do not really pertain exclusively to the rise in the energy prices. The consumer is resigned to paying the price asked by the energy companies. Only recently, almost all of the ‘Big Six’ energy suppliers within the United Kingdom announced a price increase from anywhere between 6 to 10.4%. The highest increase in price was announced by npower, which announced a hike of 10.4%. Similarly, SSE announced that on an average, consumers would have to pay 7 percent higher than what they were paying for electricity and gas. British Gas also announced that all consumers would now have to pay an additional 10 percent.
The Government has so far failed to provide any sort of relief to the consumers in this regard. Most government officials have stated that before a consumer signs a contract with a certain company over the supply of electricity and gas, they should carefully analyze the prices before signing the contract. When it comes to the supply of electricity and gas, a four part system is primarily used. The energy is first bought on the whole sale market from a generator. Then, this energy is put in to the transmission system and is then transferred to the distribution system. From the distribution system, the electrical energy is finally sent to the consumers. All prices that are related to the transmission and distribution are regulated by Ofgem, the price regulator of the United Kingdom.
However, whenever we talk about the problems in the energy market, our focus lies on just one or two aspects. This often causes a problem because we fail to truly understand the flaws of the market. There are numerous other problems in the energy market which contribute to mistrust and high prices, and in the following few paragraphs, we will see some of the main problems that really impact the consumers in the energy market of the United Kingdom:
- One of the main problems that the energy market faces is that it is very difficult for consumers to truly understand whether the retail prices asked for by the companies are a fair reflection of the wholesale prices. If you have read any press statement that is released by companies when they announce a price hike, you will read that the main reason for the rise in prices is because the wholesale price of electricity has increased. In the recent increases announced by the companies however, the main reason that was given was due to the upgrades that needed to be made to the network. As per the information released by Ofgem, the wholesale costs of electricity generally constitute more than half of the gas and electricity bills. Yet, a very large majority of around 84 percent holds the belief that the primary reason for which the prices are increased, is primarily to increase the profit margins of these electricity retailing companies. Obviously, there is a bit of both aspects involved.
- Now, most people who reside within Britain are perfectly happy to realize that a company has to generate profits in order to thrive. However, one very important point is often misconstrued when these prices are announced by the larger companies; these prices are not simply accepted by the energy retailing companies in the whole sale market. The Big Six, which comprise of the top six companies in the UK energy retailing industry, are responsible for supplying energy to around 98 percent of the households in all of the United Kingdom, while the generation businesses which are owned by these companies are responsible for an overall electricity generation of around 70 percent. This kind of ‘vertical integration’ makes it easier for the company to bring about efficiency, but on the other hand, the company makes it virtually impossible for the average user to really understand whether the retail prices are a fair reflection of the wholesale prices or not.
- These companies generally get energy supplied from their own generation businesses, or they source this energy from other companies with ‘vertical integration’, or they buy it on the wholesale market. The electricity market suffers heavily from a lack of liquidity, mainly because there is very little information available about the transfer prices as well as volumes of energy, as well as risks being distributed over different aspects of the business. Numerous critics of the energy market have stated that the supply and generation arms of the energy market should be ring fenced, similar to the way it is used by the banking industry of the United Kingdom.
- More importantly, one very big issue that consumers face is that they are often not aware of the best possible options available to them. Most consumers are generally loathe to changing their supplier, as revealed in a survey which stated that around sixty percent of the people within the United Kingdom had never changed their energy supplier, while another thirty percent had stated that they would not change their supplier again. This means that people are happy with things the way they are. Even though there are websites now which allow consumers to get an idea of the new prices by providing deep detail as well as allowing them to create comparisons, most of these websites are unable to provide accurate results. This is primarily because there is not enough information available to these websites, and as a result, their results are often skewed. Some even take introductory deals in to account and as a result, the data becomes biased in the short term. Suffice to say, the average consumer faces a lot of problems.