Why an energy price freeze may short change consumers

Suzie Neuwirth

The government’s majority against Labour’s energy price freeze was reduced to just 27 in a vote in the House of Commons this afternoon.

Labour leader Ed Miliband called for the vote last week, demanding that domestic customers and small businesses have their energy bills frozen immediately.

They may have lost the vote but the opposition are still claiming a small victory for the reduced majority, saying it shows that “Tory and Lib Dem MPs are panicking”.

Big six supplier SSE pipped Labour to the post last week, pledging a price freeze until 2016.

But is all this price freeze chat really good for the consumer, or do they deserve more?

To guarantee a price freeze until 2016, SSE must have been quietly hedging power contracts for quite a while – buying energy ahead of time to guarantee future prices.

Of course, the energy sector is not obligated to reveal its hedging strategies so we don’t know if any other big six suppliers are in the process of ramping up their own hedging ahead of consumer-pleasing announcements.

This is all well and good, as long as wholesale energy prices don’t continue to fall.

“The next movement in prices will be down, not a price freeze,” Peter Atherton, utilities analyst at Liberum, told City A.M.

“Wholesale power prices have been going down since last year and companies don’t tend to make a decision on energy bills until the autumn. I think they’ll wait until summer is over and then reduce their tariffs.”

With SSE locked in until 2016, they are at risk of being at a competitive disadvantage if their rivals do go beyond a price freeze and slash customers’ bills if wholesale prices go down.

“We can't speak for competitors or what they will do. We've made clear that although we've frozen our prices, we'll cut them if we can,” said an SSE spokesperson.