UPDATE 2-Price cut pressure mounts on UK energy firms as market costs plunge

Tue Jun 10, 2014 11:53am EDT

Related Topics

* Big six suppliers' pre-tax profit margins double in past year

* Wholesale prices have dropped due to mild winter, healthy stocks

* Energy price cuts could be put off due to Labour's freeze pledge

* Smaller, more flexible suppliers reacting, winning new customers (Adds regulator's call for explanation from suppliers, SSE comment)

By Michael Szabo and Karolin Schaps

LONDON, June 10 (Reuters) - Britain's big energy suppliers are coming under mounting pressure from consumer groups and politicians to cut household power and gas bills after a sharp drop in wholesale costs boosted the firms' profit margins.

The country's "big six" energy providers, which supply 96 percent of UK households, also faced calls from industry regulator Ofgem on Tuesday to explain why consumer energy prices had not been cut to reflect the falling wholesale market.

Around half of the average British household energy bill is made up of underlying market prices for electricity and gas, while the rest is composed of, among other things, costs for energy transport, expenses to support vulnerable customers and support for renewable energy production.

"If wholesale prices go down by 10 percent, then our bills should go down by 5 percent," said Ann Robinson, director of consumer policy at price comparison website uSwitch.

"It's time for the energy companies to seriously start thinking about reducing our bills."

Market prices for winter 2014 electricity and gas, when demand is typically highest, have dropped by 13 percent and 17 percent respectively since the end of 2013, due to healthy gas imports and unseasonably warm weather over the past six months.

As a result, Ofgem estimates that the big six are poised to double their pre-tax profit margin over the next 12 months to above 7 percent from 3.4 percent a year ago.

Data published by Ofgem last week showed so-called "dual fuel" suppliers are poised to make an average profit of 96 pounds ($160) per home over the next year, compared with an estimated 44 pounds over the past 12 months.

Ofgem estimates a typical home will spend 1,346 pounds on power and gas over the next 12 months from May - a 3.1 percent year-on-year rise - despite lower wholesale prices and a 15 percent drop in "environmental and social" costs since January.

"Energy prices and profits do not add up for consumers. Companies hike prices when costs rise, so consumers expect them to come down when wholesale costs fall sufficiently," said Gillian Guy, head of consumer group and charity Citizens Advice.

In March, Ofgem called on Britain's Competition and Markets Authority to investigate the industry after finding competition in the market was not working as well as it might, a probe that could lead to a break-up of the big six.

None of Britain's big six suppliers - SSE, EDF Energy, Scottish Power, E.ON, RWE npower and Centrica's British Gas - has passed on any recent savings from lower wholesale prices to customers.

In response to questions, the firms declined to confirm whether they would cut tariffs or why they had not already, saying only that they were constantly monitoring the market.

SSE said it had in March frozen its consumer electricity and gas prices until at least January 2016.

"Committing not to increase prices for such a long period of time requires a long-term view on costs. However, we keep a close eye on all the costs that go into supplying energy ... and if we can lower prices, we will," an SSE spokesman said.

Meanwhile, small energy suppliers, which typically have more flexible pricing due to lower running costs, have seized on the opportunity and cut bills to reflect the lower wholesale prices.

Last month, a record 50 percent of customers who chose to part ways with a major supplier signed up with a smaller one, data from energy sector trade group EnergyUK showed.

"We believe that it's only right that these savings are passed onto customers to help lower their energy bills," said small supplier First Utility's Chief Customer Officer Ed Kamm.

MILIBAND FREEZE

But energy experts argue that wholesale prices have to remain low for an extended period of time to reflect in the big suppliers' pricing methods, which are more long-term focused.

"Companies will wait until autumn to assess the situation: what is the price in the portfolio of client contracts, what have they hedged at what price and where are market prices?" said Roland Vetter, managing director at investment advisory firm CF Partners.

Others predict suppliers, fearing market intervention if the opposition Labour Party wins next year's election, will put off cutting prices for as long as possible.

Tapping voter discontent ahead of next May's general election, Labour leader Ed Miliband has pledged to freeze household energy bills for 20 months if he is elected.

"The big six are worried about cutting prices now and then having to increase them later to protect themselves should they be faced with the Miliband freeze," said uSwitch's Robinson.

Caroline Flint, Labour's shadow energy minister, said on Tuesday that if elected her party would give powers to Ofgem to force suppliers to cut prices when wholesale costs fall.

"In a properly competitive market, there is no reason why cost reductions should not be passed on as quickly as cost increases. If there is evidence that this is not happening, that clearly suggests that competition is not properly functioning and that some kind of regulatory intervention is needed," she told an industry conference in London.

Britain's Energy Secretary Edward Davey, speaking at the same event, added: "companies who aren't ensuring their consumers are getting a good deal may want to be careful ahead of the market investigation". ($1 = 0.5956 British pound) (Editing by Susan Thomas and Dale Hudson)

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