Electricity bills to drop by 12 per cent

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Household electricity bills are set to fall by 12 per cent from next April, the electricity watchdog, Offer, said yesterday after power groups pass on cheaper coal contracts and lower supply and distribution charges to consumers.

Professor Stephen Littlechild, the regulator, also gave details of a new price formula for next April's staggered start of domestic power competition, which would give rival suppliers and consumers a much clearer indication of the tariff structure.

In a consultation paper yesterday Professor Littlechild said the impact of the various reductions in costs would see average domestic bills drop from pounds 270 excluding VAT this year to pounds 238 next year. He said there could be further cuts in tariffs from some companies under the current price regime before April, though charges would vary between the 14 regional suppliers across the UK.

A large chunk of the fall would come from the expiry of high-price coal contracts signed before the privatisation of British Coal, which would feed through to lower generation prices. Generation accounts for more than half of domestic bills. Another important factor was the existing price cap on regional distribution networks, which accounts for around 30 per cent of bills.

In a significant innovation Offer said the new price formula proposed for the electricity supply market, the part of regional power companies' businesses which are to be opened to competition, would for the first time impose maximum tariffs published at the start of each year.

But Professor Littlechild did not estimate the savings from competition, which are a matter of intense debate in the industry. The supply element accounts for just 6 per cent of bills. Earlier this week Mike Hughes, chief executive of Midlands Electricity, warned it was "difficult to see how immediate price cuts will occur without cherry picking".

As competition emerges from next April, Offer said suppliers would be able to compare tariffs for different groups of consumers. The new charging structure would remain fixed throughout the year. Under the existing regime companies calculate their tariffs but can recover any revenues lost if they get their estimates wrong at the end of the year.