The next month could be an interesting one for the UK energy retailers. Apart from listening carefully to any carbon announcements at the Budget, the retailers await the publication of the joint Ofgem/Office of Fair Trading/Competition and Markets Authority (CMA) retail competition review. New Ofgem CEO Dermot Nolan will have an interesting task presenting a report he may not have authored. A full-blown CMA inquiry would perpetuate the regulatory risks around energy retail, though kicking visibility into 2015.
A more immediate issue could be possible calls for a retail price cut, following weakness in wholesale gas and power prices. Wholesale prices dropped around 10 per cent in January and February, which, if sustained, could imply a 5 per cent cut in retail prices. Energy retailers, like petrol retailers before them, have been accused of a “rockets and feathers” pricing policy, being quick to put up prices when commodity prices rise, but slow to cut them when they fall. Labour might well use a commodity drop to put pressure on the incoming regulator to show he is tough on the companies.
In fact, the retailers might feel there is little headroom for a cut at this point. First, the mild winter has seen them sell less energy. Overall bills are already likely to be lower year on year even though unit prices have gone up. Second, the wholesale price drop has happened in the past few months, while companies hedge most purchases a year or more in advance. Neither of these arguments will likely sound compelling to customers or to politicians, however.
In the short term, the Ukraine crisis might be a more effective counter-argument to calls for an immediate price cut. Gas and power prices have jumped in the past two weeks, offsetting about one-third of the January and February reductions. The spike serves as a reminder of the value to customers of hedging as well as to companies. In the longer term, companies might be advised to shift pricing away from unit charges towards a higher standing charge. This would make their profits and customers’ bills much less dependent on the weather.