U.K. Energy Prices are Plunging, But Users are Facing Rate Hikes

(Bloomberg) --

Electricity bills are headed higher for British households even though costs in the wholesale market are falling, a phenomena that one utility blamed on the government and grid operators.

Bulb Energy Ltd. became the first energy supplier to raise its prices, citing higher network and policy costs. It blamed a 3% increase in the charges it pays for grid maintenance and expansion for the higher consumer rates.

Other suppliers will be facing similar pressures and are likely to raise prices too, said Stephen Murray, an energy specialist at MoneySuperMarket, a price comparison provider.

Suppliers usually make price changes in early April, Murray said. “I don't think Bulb will be on their own.”

The amount that energy companies charge customers for power and gas has come under intense scrutiny in Britain with the energy regulator, Ofgem, enforcing a cap on the amount that customers on default tariffs have to pay. With wholesale power prices 32% lower than a year ago consumers may struggle with the idea of bills rising.

Bulb's justification is fair as policy and network costs are rising, according to Dan Starman, a consultant at Cornwall Insight Ltd. A model by Cornwall that includes 12 different charges on the domestic electricity bill shows these costs are expected to go up by about 6% year-on-year.

Bulb, a small energy supplier with 1.6 million customers, lowered its retail gas prices Monday due to “significant falls in wholesale costs.” Overall, a typical member using both electricity and gas will save 56 pounds per year. A typical member who only uses electricity will see an increase of 22 pounds per year.

Grid costs are set to increase even more. Last year, the U.K. became the first major country to target net-zero emissions by 2050. This will require the electrification of heating and transport causing a huge boost in demand. It's likely that some policy intervention will be needed as falling gas costs will drive customers to use more of the fossil fuel rather than switch to greener options.

One suggestion is that the network and policy costs should be removed from electricity and recovered through a different mechanism, according to Starman. This would remove some burden from the bills of lower income customers.

“When it comes to heat, policy will need to be progressive, recognizing heat is a social issue and fuel poverty a very real concern in Great Britain, where we have some of the oldest and least energy-efficient housing stock in Europe,” Starman said.

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Andrew Reierson, Lars Paulsson

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