Why energy firms are hiking prices

by Ed Bowsher on 26 November 2010  |  2 comments
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Energy companies have boosted their profit margins massively in the last couple of months. Here's one reason why.

Energy companies are having a great time at the moment. Cold weather will boost consumption and the regulator said today that the companies have increased their profit margins by 38% in the last two months.

That’s a shocking rise and many pundits have already had their say. There was one comment in particular that caught my eye. It came from the well-known TV star, Martin Lewis.

He said:

“We shouldn’t get annoyed with energy companies for putting up prices up. They’re just doing their job – which is  NOT to keep us warm, but to make money for their shareholders. After all, that’s who we sold them to when they were privatised.

“The people we should get angry with regulators and politicians; they are the ones with the responsibility for ensuring a good supply of energy at a fair price.”

There’s something in that. Regulators and politicians deserve criticism and I’ll make some of my own in a minute. But unlike Mr Lewis, I’m not going to let the energy suppliers off the hook. In a properly functioning free market, suppliers shouldn’t be able to jack up margins at such speed. That makes me suspect that the suppliers have colluded. In other words, there may have been quiet ‘nods and winks’ between suppliers about price rises.

If that has actually happened, the suppliers have broken the law. I hope Ofgem aggressively examine the evidence on this. They mustn’t be fobbed off with fluent excuses from highly-paid lawyers.

But as I said, I do think that regulators and politicians have made mistakes too. The one that annoys me most was in the 90s.

When the electricity industry was privatised, the government sensibly split the industry into generators and suppliers. So most electricity was generated by two big suppliers, National Power and PowerGen, who sold their electricity to suppliers such as Southern Electricity.  The suppliers then sold electricity to households.

This structure delivered more transparency and more competition. More competition meant collusion was less likely and more transparency meant it was easier for the regulator to see if consumers were being ripped off.

Foolishly, the regulators allowed the generators and suppliers to merge in the 90s, and I think that’s one reason why the energy industry has been able to jack up margins and rip off consumers in recent times.

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