Why are energy prices still so high?

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Money news, advice and predictions for savers and spenders. This week: Cutting down on fuel bill.

By Jeremy Gates

If household gas and electricity prices soared 42% in 2008 because of sky-high oil prices, why have they only dropped 4.2% in 2009 when oil prices went through the floor?

The answer to that question, claims a new analysis from the watchdog Consumer Focus, is that energy companies are pocketing an extra £1.6 billion extra a year by failing to pass on huge falls in wholesale prices in the last year.

Consumer Focus, which replaced energywatch in January with a wider consumer remit, claims we are currently being overcharged by £361 million a year for electricity - that's £13.80 per household - and by £1.3 million for gas, or £60.10 for the average home.

At current wholesale prices, it says, suppliers could afford to cut prices now and again in the winter to save average households around £157 per year.

Mark Todd, director at price comparison service energyhelpline, says that energy bills remain at record levels despite a plummet in wholesale prices in the past 12 months.

"We have thought that this was because suppliers were holding onto cash, but we believe every bill landing on consumers' doormats contains a 'hidden' tax. This is a major reason why bills are coming down so slowly," he says.

These "hidden taxes" are understood to be raising billions for investments in free insulation, green measures and new-generation power stations to replace many existing ones which will become defunct by 2020.

In the last couple of years, energy prices have become a key political issue in the 'climate change' debate. A Royal Society report this week, compiled by leading scientists and engineers, demands that energy prices must go higher still "if we're going to try to preserve the environment".

However, energy bills will soon be a pressing issue in many homes, as 'fixes' taken out to beat the giant rises of 2008 begin to expire.

If these customers do nothing, says price comparison site uSwitch.com, their energy costs will rise by £100 per year as they go onto standard rate when their fixes end. The npower fix is the first to run out, on July 31.

Todd reckons that consumers who have never switched suppliers could probably save up to £378 a year by doing so now.

Will Marples, energy expert at uSwitch.com, reckons 4.6 million UK households took out fixed or capped rate energy plans as prices soared.

"Without doubt, those who fixed energy prices last year to avoid the biggest price hikes have done well," he says. "But as price protection ends, households could face a nasty shock if they don't look around for their next deal.

"They cannot afford to move onto a standard plan or accept a new or capped deal from a supplier without doing their homework first."

Although there are only six main energy suppliers left, along with seven smaller ones, careful analysis of all available tariffs is such a complex job that only price comparison sites can usually do it.

Gareth Kloet, head of utilities at comparison site Confused.com, says there could be as many as 14,000 energy tariffs across Britain, with perhaps 1,200 available in any one region.

Kloet thinks consumers on fixed-rate tariffs are sitting pretty if they arranged them pre-June 2008. Later fixers have been much less successful, as prices have fallen, and some might even consider paying the £60 cancellation fee levied on some dual-fuel agreements to end fixes early.

Then what? With Government and the climate change lobby seeing energy bills as a cash cow to pay for greener policies, prices can't be expected to fall much below current levels.

"My hunch is that energy prices will continue to go up, slowly. Expect no massive moves in either direction in the next six months," Kloet says.

All the analysts agree on one point: internet tariffs invariably offer the cheapest energy, particularly with online billing.

Marples says: "Online energy plans currently offer the lowest prices, but only 5% of households - about 1.3 million in total - are signed up to one."

Kloet recommends: "My overall 'Best Buy' is the British Gas Websaver3, a tracker rate guaranteed to be 6% below BG's standard tariff and paid by direct debit.

"Despite the criticism, BG has actually been cheapest dual-fuel provider since November 2008, and its click energy online tariff was the best buy through 2008."

Kloet reckons the average family on BG's websaver pays £1,018.37 per year for gas and electricity. A consumer leaving BG's standard tariff, paying by cash or cheque, could save £243.24 per year on the websaver.

If you want a fix - to be sure of exactly how much you will pay for months ahead - Kloet tips Scottish Power's Online Energy Saver 6, which costs £1,064.52 per year to heat an average home.

That's only £46 above the lowest BG price, a small price to pay for immunity to rises for a specified period.

According to uSwitch.com, the best value fixes include Scottish Power Fixed Price Energy 2009 Online NCS Dual Fuel (£1,020 per year), npower One Dual Fuel (£1,025), Scottish Power Fixed Price Energy 2009 Dual Fuel (£1,032) and E.ON Energy Saver 3 Dual Fuel (£1,060).

For lazy customers yet to escape the standard rate - about 20% of all households - the average price of household energy is £1,261.61 per year, including £799.48 for gas and £462.13 for electricity.

Anybody moving from BG's standard tariff to its current websaver therefore saves £243.24p at today's price levels.

Perhaps energy prices faded from the limelight in late-2008 as the financial system threatened to collapse. Despite the summer heat, we should think again how to save tens, maybe hundreds of pounds in the winter chill.

How to cut fuel bills

Tesco's price-comparison website (www.tescocompare.com) offers the following tips:

:: Various gadgets, mostly cheap and easy to install, allow tighter control of energy costs. A wireless electricity monitor (£30-50) gives invaluable information, showing how much energy is used on lighting, having TVs on standby and running an electric towel rail in the bathroom.

:: With gas/electricity bills exceeding 10% of most households' disposable income, it makes sense to use a price-comparison service. Dual-fuel deals, using one supplier for gas and electricity, invariably save money.

:: Most of the best energy deals are online, but customers should log in regularly and provide accurate meter readings.

:: Paying by monthly direct debit gets a discount too, but submit a meter reading every quarter and ask suppliers to reduce monthly payments in summer when usage is lower to keep your credit balance down. If it tops £150, ask for some money back.

:: Keep cool this summer by minimising sources of heat: turn off what you don't use, use insulation where possible and invest in more efficient lighting. The Energy Savings Trust (www.est.org.uk) has information on how to make a home more energy efficient.

:: Many deals and tariffs may be offered on a 'first come, first served' basis: if you see a good deal, snap it up.

Poundnotes

:: Small investors might have timed their move back into a rising stock market rather well, having pumped £902 million back into equities during April and May, says Capita Registrars.

By May 31, private investors owned shares worth £130 billion, equivalent to 9.52% of the FTSE All-Share, and 27% higher than the low point of £96 billion recorded at the end of March - the lowest value since 1974 in inflation-adjusted terms.

Capita operations director Michael Kempe says: "Private investors were far-sighted enough to take money out of the market before the recession started and have been putting it back in, even in the teeth of the downturn.

"With more positive news emerging on the outlook for the economy, they are reaping the benefits of buying when things looked particularly gloomy."

:: Seven leading lenders - B&B, Cumberland BS, Furness BS, Smile, Co-op Bank, Cheshire Bank, Stroud & Swindon BS - have quietly bumped up the cost of unsecured personal loans by 1% over the past four weeks, claims price comparison site uSwitch.com.

This pushes up the interest bill on a £10,000 loan over five years from £2,283 to £2,371. But uSwitch says that while 13 deals for existing loan customers cost an average 8.5% APR, the average rate for loans targeted at new customers is 9.02%.

Louise Bond at uSwitch says: "At this moment, loyalty is king, and many consumers could find a preferential loan rate with their existing provider. It's worth finding out what they can offer you before you search the rest of the market."

:: Housebuyers who want a mortgage with a loan-to-value (LTV) ratio above 75% may see the rate jump so sharply that the pace of recovery in the housing market could be set back, claims Moneynet.co.uk's Andrew Hagger.

Halifax adds 1.13% to its mortgage rate on an 85% LTV loan which costs 6.68%, with a £995 fee. Northern Rock charges 6.99% at 85% LTV, also with a £995 fee. NatWest charges 5.89% at 85% LTV, with £299 fee.

"Maybe lenders are factoring in additional profit while volumes are low, but unless they review their pricing, it's a bit of a 'Catch 22' situation which may ensure that mortgage and housing sales remain subdued," Hagger warns.

:: Only 35% of women qualify for a full State old-age pension, compared with 90% of men. Malcolm Cuthbert at Killik & Co says stay-at-homes wives may be seriously underfunded in their later years, particularly after a divorce.

"The most important thing any woman can do is to take control of her own finances to ensure she is well provided for and not on the breadline in retirement," Cuthbert says.

For a more affluent old age, he recommends:

- Get as near as possible to 30 qualifying years of contributions to get the full basic State Pension (£95.25 per week, or £4,953 per year).

- Pay into a private pension, possibly adding to any regular contributions with inherited wealth.

- Make the most of annual ISA allowances to build a lump sum paying tax-free interest and capital gains.

- Get a fair divorce, which won't always mean accepting the matrimonial home in return for giving up any entitlement to part of the husband's pension, as has been customary in the past.

- Shop around for the best annuity on any private pension plan.

Information: Killik & Co enquiries: 020 7337 0520 and www.killik.com.

:: High-five savers

Phone No Rate Account Period Deposit Interest paid

Clydesdale Bank via branch 5.00% (F) Five Year Bond Five Years £2,000 Yly

Halifax www.halifax.co.uk 4.75% (F) Web Saver Five Year Bond £500 Yly

Ruffer Bank 01372 736700 4.52% Fixed Rate Bond Five Years (P) £10,000 Quarterly

United Nat'l Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly

Coventry BS 0845 766 5522 3.0% Poppy Save None £1,000 Yly

:: Top-five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes

First Direct 0845 610 0100 2.89% variable for term 75% £799 Yes

HSBC 0800 494 999 2.95% variable for term 75% £799 Yes

Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes

Loughborough BS (FTB) 01509 610707 3.39% for two years 80% £449 Yes

Code:

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).