Britain’s energy suppliers have come in for a kicking this year, first with another round of price hikes in the spring, followed by the spectre of the price cap that has followed them since the election. British Gas, Britain’s biggest energy provider, announced only last week that it lost 800,000 customers in just three months.
However, I’m not here to kick the Big Six energy suppliers when they’re down. Instead, I want to talk about another less well known type of energy company – the energy networks.
The networks are the companies that get the gas and electricity to your home – think National Grid and others. In total there are ten of these companies, all privatised in the 1980s, and last year they made £7.5 billion in operating profit. I’m sure ConHome readers might say there’s nothing wrong with that.
But unfortunately there is. These companies have zero competition. They are natural monopolies. And they’re taking advantage of their privileged position.
They need proper scrutiny. The money that these companies make comes from your energy bill and make up roughly a quarter. That’s £290 of the average household’s bill. They should keep costs down and ensure all customers are getting a fair deal. This isn’t happening.
These companies make profit margins of up to 39 per cent, whereas in Europe the equivalent companies have around an eight per cent margin. Furthermore, consumers see vast variations in their bills depending on which one of these monopoly companies delivers the energy to the home i.e. where they live.
This can lead to differences of £139 for two people on the same energy deal, with the same supplier, using the same amount of gas and electricity, but living in different parts of the country. We even found one case where someone would pay £120 a year for the same energy as his neighbours on the same street. It’s confusing and unfair.
The Big Six have rightly had a lot of scrutiny. But at least they act in a market. You can choose another supplier if you’re unhappy, and there are a lot of them these days. You can’t choose another grid operator.
That means the regulator and government must keep a close eye on them, as the market can’t. Sadly scrutiny has been lacking and is long overdue.
First the regulator needs to look at profits. We have no objection to a company making profit, and these companies do a lot of work maintaining and investing in our energy networks to make them fit for the future. But £7.5 billion is simply too much when it comes from my bill and yours – and that’s gone up by £1 billion since 2013.
If they instead made a more reasonable profit of say five per cent (the kind of level that supermarkets and the Big Six energy companies enjoy) energy bills could drop by as much as £60. Given the low risk nature of these companies a profit margin of 20-39 per cent is simply way too big.
But more importantly, the postcode lottery these companies preside over needs correcting too. They would argue that they need to charge different prices for different areas of the country: it simply costs more to get energy to your home if you live in South West England compared to the major cities of Glasgow and Edinburgh.
Again, we’re happy for people to pay more for goods and services if they choose too, but in this case they don’t and people won’t up sticks and move home to cut their energy bill by £100. Furthermore, the arbitrary boundaries lead to ridiculous situations where near neighbours pay vastly different amounts.
We propose ending the postcode lottery and reducing everybody’s bills down to the level in the lowest region (that’s Yorkshire). This would see bill cuts for the vast majority of consumers, with no one having to pay more. Regional pricing would end, making the energy market fairer and much less confusing for consumers.
But this isn’t a cost neutral proposal. We estimate to reduce everybody’s bills down to Yorkshire’s level would cost £643 million. There’s no way taxpayers should bear that burden.
It’s just one tenth of the mega profits the network companies make every year. They can afford this to bring about a system where everyone pays one price no matter where they live at no cost to the taxpayer.
Ofgem have already announced they plan tighter regulation for the network monopiles in the near future. Good news. But they’ve no plans to end the energy postcode lottery and say that any changes would have to be brought in by government.
We feel this is wrong. The price cap is hugely controversial, particularly amongst Conservative MPs, and yet Theresa May has made it a key part of her programme. Our proposals to end the energy postcode lottery are far less radical.
We’re asking government to cut energy bills for millions of consumers by looking at how monopoly businesses operate and changing it for the better. An easy fix with none of the dangers of disrupting a competitive market. A fix that Conservatives should support.