Energy bills: the hidden shock
Some gas and electricity customers are paying 40% more than a year ago after energy companies pulled their cheapest online-only deals
Are you puzzled why your energy bills have risen by far more than the industry’s quoted figures? This week Guardian Money can reveal that millions of households that switched to low-cost online gas and electricity deals have seen their bills rise by as much £360 a year – twice as much as those who never switched – following the scrapping of cheap online tariffs.
The increases, which have added 30%-40% to total bills and followed an intervention of the regulator, are in stark contrast to the widely publicised price rises of around 20% put out by the industry.
The rises are an unintended consequence of Ofgem forcing energy companies to simplify their tariff structures. In response, the companies have largely repriced their cheap online deals upwards, leaving those who switched facing massive price hikes.
But the winners are conventional households, who never switched online. They are seeing their bills rise by less and are no longer “cross-subsidising” internet-savvy customers.
Figures prepared for Money by uSwitch show the cost of the average “best buy” domestic gas and electricity deal bought online has jumped by £250 a year since September 2010. For those who had signed up to the cheapest online deals the rise was £360. Over the same 20 months annual bills for those on conventional tariffs – customers paying by cheque or similar on receipt of bill – rose by £185.
In December 2011 Ofgem told the energy firms to scrap baffling bills and change to simplified standard tariffs. Behind the scenes there had long been a feeling that some firms had been offering artificially low online deals to switchers at the expense of existing customers. British Gas and Scottish & Southern Energy (SSE) had already scrapped their cheapest online only deals, partly in response to this pressure. But the consequence is that prices overall have simply gone up, with some households bearing more of the burden than others.
British Gas’s online customers have seen the biggest increase over the past 20 months. In September 2010 customers on the firm’s cheapest dual fuel tariff were paying an attractive average of £782 a year, a significant saving at the time compared with standard British Gas customers who by then were paying more than £1,000 a year. Twenty months on and the firm’s “best buy” customers are now paying an average of £1,120, a 42% increase. British Gas customers who pay on receipt of bill have seen prices rise by a much lesser amount – albeit a still hefty 23% increase.
Over the past year Money has been contacted by several readers who have seen their bills rise by huge amounts at a time when wages have barely risen. Alec Fraser, then an SSE customer on its Go Direct 5 online tariff, told us how his gas bill went up 18% in September 2011, then rose a further 15% when the online tariff expired three months later. These hikes were mirrored across the energy sector, leaving many households puzzled as to why their bills were rising much more than industry reported increases.
Lucy Darch, director of energy at uSwitch, says: “What we are seeing is a delay or time lag. Standard cash and cheque prices rocketed in 2008 by £334, or 29%, taking the average household bill from £819 to £1,153. Online or best buy prices have slowly followed, and these hikes have now filtered through, though the average best buy price £163 a year is still cheaper than the average standard price.”
Mark Todd, from Energyhelpline.com says the government told suppliers to narrow the gap between online tariffs and standard tariffs.
“Suppliers now have to justify their cost differences between tariffs and have been told that they can not loss-lead to gain new customers,” he says. “We feel that these restrictions on suppliers are dampening the energy switching market, meaning that the offers suppliers can put out in the market are not as good as they could be. If the government were to loosen the rules then suppliers could produce cheaper tariffs for new customers. On the positive side, most online tariffs are now fixed price and therefore the low rates are guaranteed for at least a year and sometimes 18 months.”
Ian Peters, head of British Gas Energy, denied there had been some kind of hidden price increase and told Money that prices in 2010 for online customers had effectively been too low: “We were repeatedly told by customers that they wanted tariffs that were simpler, more transparent and fairer, irrespective of how they paid their bill.
“Eighteen months ago our best [online] deals were probably not as cost-reflective as they should have been. We have now rectified this and introduced a more streamlined set of tariffs that are fairer to all customers.”
He says those choosing to paying by direct debits can save £60-£70 a year. Those who elect to manage their accounts online can save a similar amount. “All our bills now set out very clearly what a customer can save by switching to a different tariff within British Gas,” he added.
An Ofcom spokesman said: “We recognise that discounted offers can help stimulate competition and our proposed reforms would allow this to continue in the framework of more simplified market. However, one possible explanation for the reduction in the online discounts is the hedging strategies of the companies. In 2010, because wholesale energy prices had just fallen sharply, there was a large difference between the lower price of gas and electricity available on the market and the higher price companies had paid in advance. This allowed companies to offer attractive deals to win new consumers using the cheaper energy available on the market. Since late 2010 market prices have risen for suppliers and is no longer cheap relative to hedged costs, which reduces the opportunity to offer large online discounts.”
• British Gas has changed the way it charges for gas for new customers. They will pay one amount for each unit of gas, plus a standing charge, doing away with the previously confusing two tier pricing structure. Existing customers can switch to it. It benefits higher use customers as they get a bigger discount if they pay by direct debit.