Have we seen the bottom for discounted energy bills…?

Wholesale Energy Prices April 2010

Wholesale Energy Prices April 2010


We think so!
 
Today OVO Energy increased the price of its cheapest tariff, New Energy Fixed, by around 8% (£70) from £855 to £925 for the average Dual Fuel customer.
 
To be clear, OVO Energy customers are not seeing a price increase, as their existing tariffs are fixed for a 12-month period. It is just that new customers will no longer be able to get the same cracking deal that they could have had yesterday.
 
Why is this important?
 
OVO Energy is a relatively new player in the energy retail space. It entered the market in September 2009, but since that time has been a price leader. Since launch, it has been top of the best buy tables 38% of the time with an average position of 2.3. For Fixed tariffs (its cheapest tariffs are fixed) it has dominated the best buy tables.
 
OVO Energy has been able to achieve this by running a lean operation but also by taking advantage of low and falling wholesale energy prices. Up until now.
 
Over the past month wholesale prices have started to recover with wholesale gas prices up by over 20% in the past month.
 
There has been no particular new information behind the gas price recovery. However, it should be noted that natural gas was one of the worst performing commodities in 2009, so this gradual price recovery may be more sustainable as economic fundamentals improve.
 
What this means is that OVO Energy can no longer afford to sell energy at knock down prices.
 
The same will also apply to other suppliers operating similar business models, for example, first:utility. We would expect first:utility to have to lift its prices in the not too distant future.
 
With the smaller price leaders out of the way, what chance that the Big 6 will come in to take up the fight and drive prices lower. Pretty slim we think.
 
We doubt there would be such aggressive competition for discounted tariffs without the likes of OVO Energy and first:utility in the market. From here, we expect that discounted energy tariffs are more likely to rise than fall. This also applies to Fixed Rate deals as, rather unusually, some of the most discounted deals are Fixed Rate offers.
 

What we think:
 
The recent bounce in wholesale energy prices poses no immediate risk of price rises for customers on Standard tariffs. How could it, given that standard tariffs have barely fallen by 10% when wholesale prices have fallen by over 50% since their peak.
 
However, it now looks that we are at, or close to, the bottom as far as discounted tariffs and cheap fixed tariffs are concerned. Anyone looking for some price stability on their energy bills now should bag a cheap fixed deal now.

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