Energy firms refuse to pass on cost cuts

Monday, December 8, 2008

Energy firms will refuse to pass on all of the savings they make on cheaper wholesale gas and electricity to consumers, one of the UK's top energy bosses admitted this weekend.

The warning, issued by Paul Golby, chief executive of Eon UK, came after a week in which the price of oil tumbled to just above $40 a barrel. As the government demands that the banks give borrowers the benefit of the latest cut in interest rates, energy companies are also coming under increasing pressure to cut customers' bills.

Last week, two of the big suppliers - German-owned RWE Npower and Eon UK - announced they were making limited reductions in some of their customers' electricity bills.

But consumers who hope that these moves will spark a round of dramatic falls in their energy bills are likely to be disappointed. Golby told The Observer that the industry needed to protect its profit margins. This was in order to invest an estimated £100bn to build new wind farms and power plants, and to meet the government's ambitious environmental targets, he said.

In the future there would be a 'disconnect' between the wholesale price suppliers pay for gas and what they charge customers to use it, he added. 'If wholesale gas prices have fallen by a third, it does not mean retail prices will go down by the same amount.'

In the last year, energy companies have increased bills by about a third on average, blaming this on the doubling in the cost of wholesale gas and electricity. Since the summer, however, wholesale prices have sunk back to where they were at the beginning of the year, before bills started to rocket. But suppliers have yet to cut bills across the board in response.

Eon's profits in the UK fell by 25 per cent to about €750m (£650m) in the first nine months of the year, mainly because it did not pass on the full cost of wholesale price rises earlier this year.

But Golby explained that profits needed to be higher to be able to invest in new plant. 'Profits are not high enough to match the cost of capital needed for investment, for example in new plants. I accept that the group profit figures [of €7.7bn for the first nine months of the year] we report look large, but we need capital to invest.'

He added: 'It's difficult to finance [the investment needed] in the current financial environment if the government makes us reduce already lower-than- needed profits. Where will the investment come from? The government won't build nuclear plants or wind farms.'

He reassured customers that if wholesale energy prices continued to fall, some of the savings would be passed on. 'We will see energy prices go up because of all this investment which the industry needs to make. If wholesale prices fall, that helps to mitigate this.'

But he admitted: 'Energy is going to be far more expensive in the future than in the past. We have to prepare customers and the electorate to that fact and help them through the transition.'

Last year Eon made profits of £777m in the UK and invested £935m in new infrastructure.

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