50% chance energy prices will rise

Suppliers are strongly resisting big reductions and there's a 50% chance of a big increase for the winter. That's why cheap fixed deals make more sense than ever.

The big six energy suppliers have dozens of tariffs. This makes it very easy to confuse us.

That's exactly what they did in the first half of this year. From February to early July there were 10 price reductions or new tariffs. Most of them were announced with a fanfare, typically claiming a reduction of about 10%.

Here's the thing: suppliers didn't bring down the cost of their cheapest tariffs, just their expensive ones. Today, those reduced-price tariffs remain expensive.

There were a couple of exceptions. British Gas introduced a new tariff version in May that was cheaper - by a paltry 1.4%. That's not as impressive as we were led to believe, less so when you compare that summer reduction to the average 30% increase before last winter.

Also, in the Spring for a short time was an attractively-priced fixed deal. It was so attractive that I speculated prices would really fall, which they now have. Well, sort of.

Prices have sort of fallen

In the second half of this year, we've seen seven changes that have reduced energy prices by about 5%; a £1,000 bill might be reduced to £950.

Let's be clear: if you stick with your current deal, you won't benefit. It's just people switching to the latest tariffs who will. What's more, most people aren't on the cheapest tariffs and are paying £150 to £350 too much, so they could save way over 5%.

I define a genuine fall in prices as one that is large enough by itself to encourage people to move. Those people on more expensive tariffs who didn't switch two months ago to save £250 aren't any more likely to switch now that they can save £300.

Most of us who shop around will also consider this too small a reward. If you were on the cheapest tariff just before the reduction, you're not going to switch for a £50 saving. It requires a £100+ fall before most bargain hunters would move.

What competition?

Competition is warming up, but the energy companies are just playing marbles, not fighting a war. Energy companies want to fight a price war, so long as it doesn't result in actually giving us real reductions.

Competition isn't working, because of the way suppliers handle its three types of customer.

The majority of people rarely or never switch. Never-switchers pay a fortune and never put pressure on suppliers to hand them a good deal.

Then there's the new-switchers. This second type of a customer could be one who's just converted to a bargain hunter or who has had enough of bad customer service. This is a relatively small market, but energy companies want a piece of it to make up for people leaving their own services.

To that end, energy companies will try to maintain high or top spots on comparison tables.

However, they don't want to be so cheap that they make the third type of customer, the bargain hunter, switch. If one provider slashed prices wildly they would all have to. As a result, they'd all make less money on bargain hunters, who are less in number than never-switchers, but there are still millions of them.

The big six tread a fine line between trying to remain competitive for new-switchers without being so competitive that bargain hunters, who are already on cheaper deals, get far cheaper ones. Fighting for greater market share would leave them all worse off, so they don't do it.

Hence the playing with marbles analogy, because downward price-movements have been more playful than significant.

The real war

Energy companies do fight hard, just not with each other. Their common enemy is OFGEM, which they react aggressively towards whenever it makes timid criticisms.

OFGEM made a typically lame request recently for suppliers to explain to customers why they're not reducing prices. One energy company reacted in the usual way by saying that, not only must prices rise soon, but that prices are in fact too low already. Suppliers then conceded to OFGEM and the consumer a 5% reduction, but that's it.

OFGEM is being thrashed again.

What about the future?

Florian Ritzmann of Xelector (who has worked with energy suppliers for ten years) reckons oil will breach $100 a barrel this year, which will give energy companies an excuse to increase prices.

He also points out that energy companies will need to increase investment considerably from 2010 and beyond to modernise the grid and coal plants, and to cover increasing generation and distribution costs as technology becomes more environmentally friendly.

He reckons the odds of prices rising for the winter are around 50%.

Ritzmann says: 'At this point in time the recession is on your side'. This seems encouraging, but consider how little prices have fallen despite the massive effects of the recession on the rest of the economy. That doesn't bode well for prices in future.

Ritzmann adds: 'If you can find a cheap fixed-price deal, now is a great time to strike. As soon as economies recover, prices will continue their upward trend. 

'The reason why you see good fixed rates now is because suppliers can buy the energy forward at a good price. Some counterparty carries the risk of prices increasing. Once wholesale starts rising the opportunity to create such deals disappears.'

Even though Ritzmann has a good record for calling oil prices since I've been consulting him over the past three years, I don't like to make short-term predictions on oil or any market, as these things tend to go wrong.

However, he's certainly right about the industry's growing costs. Plus, as it's the suppliers' policy to resist at every turn a real reduction in prices, and use any excuse to raise them as much as possible, cheap fixed tariffs seem a reasonable bet.

Right now, some fixed tariffs in some areas are as cheap as variable tariffs. Look for E.ON's fixed tariff in particular.

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