Leading article: Energy price gouging can be stopped

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The revelation that the profit margins, per customer, of the big-six energy firms have risen eightfold in four months is yet more evidence that the UK energy market is working primarily in the interests of producers, not consumers.

The firms say that higher customer bills – which now average £1,345 a year per household – are attributable to higher wholesale energy prices. In other words, they argue that their own costs have gone up as the international price of oil and gas has soared.

Wholesale prices seem to be a one-way street as far as these firms are concerned. When global energy prices fall, as they did in 2008-09, fuel bills remain high. When they rise, as they have since 2010, the companies pass the increases on to customers. In response, the sector's regulator, Ofgem, proposes some tinkering. It wants to force suppliers to simplify tariffs to make it easier for customers to compare prices and switch suppliers. No one would object to simpler bills. But this alone is not going to deliver dramatic effects on prices. That is because the fundamental problem lies not in the behaviour of customers, but in the structure of the market.

The energy firms operate like an effective cartel. Customer prices charged by different firms move with remarkable synchronicity. The solution is to demand that these firms break themselves up into smaller units and generate proper competition. That would exert downward pressure on customer prices. Ofgem should never have allowed the sector to be dominated by such a small number of players.

Another problem is that these firms are vertically integrated, which means that they generate electricity and sell it to customers. In other words, they make money right across the supply chain.

The solution here is to compel firms to auction all the energy they produce in a transparent market, which different energy retail arms would then bid for. That, too, should exert downward pressure on final customer prices. Until the regulatory authorities address the structure of the energy market, rather than merely trying to give customers more information, the gouging will continue.

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