Ofgem, the energy regulator, warned energy supply companies today that they may be forced to pass on the benefits of falling wholesale gas prices to customers in the new year.
Alistair Buchanan, the chief executive of Ofgem, said: “Ofgem’s role is to ensure that companies can invest, but do not use investment as a shameful excuse to overcharge consumers.”
The regulator noted that wholesale energy prices had fallen in 2009, raising profitability for the energy suppliers to a five-year high.
The cost of buying wholesale gas for the big six energy companies – Centrica, Scottish & Southern Electricity (SSE), Scottish Power, RWE, E.ON and EDF – has fallen on average by £60 per customer bill over the past six months, according to Ofgem.
Companies’ profits on dual-fuel customers, who take gas and electricity from the same supplier, had risen sharply in the past few months and would increase further in the new year if prices remain unchanged, the regulator said.
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Mr Buchanan said: “At the moment, the effect of companies smoothing prices has been neutral on consumers, but if prices stay unchanged in the new year, then we will see customers losing out.”
Ofgem has been conducting a review of the energy market to ensure that customers are not being short-changed and Mr Buchanan said that there would be a further investigation of the power generation market in the new year.
Mr Buchanan warned: “We will not shy away from proposing radical reform to protect the interests of consumers.”
Separately, Ofgem announced today that it will allow Britain’s 14 regional electricity distributors to raise prices by 5.6 per cent for the next five years.
The average bill will rise by £4.30 a year from next April. About 16 per cent, or £76, of the average electricity customer’s annual bill goes towards the regional electricity distributor.
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Ofgem said that the increase would allow electricity distributors to spend £7.2 billion to upgrade the ageing pylon networks that link the national grid to homes.
Today’s announcement is an increase on Ofgem’s outline proposal in August, which would have allowed the companies to raise £6.5 billion, by increasing bills by just under £4 a year for the next five years.
A spokesman for Ofgem said: “We have agreed that the companies needed the extra investment, particularly to allow for a switch to a greener electricity supply.”
The £7.2 billion figure also includes £500 million the companies will be allowed to raise to pave the way for large-scale trials of “smart grids”, which use special meters and other technology to reduce carbon emissions.
Mr Buchanan said: “Our proposals are tough on inefficiency and poor service but fair in allowing the companies to invest to replace ageing network assets and improve the environment.”
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However, the regulator’s plan is likely to face a backlash from the industry. Ofgem said that it was allowing the two most efficient companies to spend the sum they asked for, but overall the bids from all 14 companies were cut by 8 per cent.
SSE, which owns two electricity distributors – Scottish Hydro Electric Power Distribution and Southern Electric Power Distribution – said that the increases it was being allowed looked too low and that it would have to “reassess its appetite for further investment in and acquisition of electricity distribution and transmission assets”.
The 5.6 per cent average rise in bills translates as a 4 per cent annual return allowed on each company’s investment after tax. SSE said this was well below all previous controls, including those set by Ofgem five years ago and by Ofwat for the water and sewerage industry last month.
Companies have until January 6 to respond.
The ownership of the power lines between the home and the main backbone grid is divided into 14 regional monopolies run by companies including CE Electric, Scottish Power, SSE, the US-owned Western Power Distribution, E.ON and EDF Energy.
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Ofgem also said that it was suspending its current policy on mergers between electricity distribution companies, which forces them to cut £32 million from their bills should they merge.
It would look at any merger proposals on a case-by-case basis while it undertook a review of the policy, it said. Since the policy was set in 2002, National Grid has sold off five of its gas distribution networks, changing the ownership structure.