Leading article: This is no time to tread softly around the energy companies

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The great energy rip-off continues. The wholesale price of gas has risen in recent months so the large household energy suppliers are raising their consumer prices.

British Gas has become the latest to do so, announcing a 7 per cent increase yesterday. This comes after a similar price hike by Scottish & Southern Energy last month. And the rest of the "big six" UK energy suppliers are expected to follow soon.

The problem is that the energy sector is only selectively responsive to fluctuations in market prices. Wholesale energy prices are 50 per cent below their peak in 2008, yet consumer bills have fallen by just 10 per cent in that time. It is a familiar story: consumer prices are sticky on the way down, but well lubricated on the way up.

But the fact that we are used to these gouging tactics by energy firms does not make them any more acceptable. This represents a market failure. Competition should hold down consumer prices. But the number of household power suppliers has fallen from 20 to six since privatisation in the 1990s. A competent regulator would not have allowed this situation to develop. But Ofgem, which supposedly oversees the industry, has repeatedly shown itself to be unwilling to bring the energy giants into line. The result is an energy sector that is uncomfortably similar to a cartel.

And the Coalition has, so far, been no more willing than the previous administration to address this problem. The Energy Secretary, Chris Huhne, has warned firms to give customers ample warning of price rises. But he has not indicated a desire to force structural reform. And the Coalition's decision to abolish the Consumer Focus watchdog, transferring its function to the Citizens Advice Bureau, will only make it more difficult for consumers to resist the excesses of the energy giants.

The suspicion is that ministers are treading softly around these firms because they are relying on them to invest some £200bn in low-carbon energy infrastructure over the next decade. Yet a failure to tackle the vested interests of the energy sector would represent a strategic mistake by the Government. Consumer energy prices will inevitably need to rise over the medium term as firms make investments, under Government pressure, to decarbonise our energy supplies. Massive investment in wind, wave and nuclear power is necessary if Britain is to meet its target of generating 20 per cent of our energy from renewable by 2020.

There will be transitional costs as we, as a nation, wean ourselves of our reliance on fossil fuels such as gas and coal. If the authorities allow this type of customer gouging to take place on top of the rise in prices to pay for green investment, the entire shift to low-carbon energy risks being discredited by association. The price of a failure to bring the energy sector into line could be the failure of the Coalition's green agenda.

The previous round of energy bill hikes came before the recession. These latest increases will hit at a time when many households are under intense financial pressure, as state spending cuts begin to bite and VAT is poised to rise. Opinion polls show that the energy firms are already deeply unpopular. If ministers are shrewd they will send a message to the energy giants this winter that it is time for the rip-off to end. This is a rare chance for the Government to be both popular and right.

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