Protect yourself from soaring energy bills

Energy bills are hitting the headlines on a regular basis as suppliers hike prices and householders increasingly struggle to cope. Not only are higher bills squeezing budgets, the dramatic increase in the price of gas, electricity and heating oil is forcing up inflation, which has kept the Bank of England from cutting interest rates.

But what is behind this rise, and is there anything homeowners can do to protect themselves from further increases?

Price hikes

At the start of the year, all six major suppliers – British gas, Npower, EDF, Scottish Power, Scottish and Southern Energy and E.On – increased their tariffs.

In early January, Npower raised its prices for electricity customers by 12.7 per cent and its gas prices by 17.2 per cent. Its rivals followed with similar hikes and by February all the major companies had increased their bills.

Last week, EDF raised its prices again, raising the cost of energy for the second time in six months. EDF customers will now pay an additional 17 per cent for electricity and 22 per cent for gas.

If January's price rises are anything to go by, other companies will soon follow EDF's lead.

Why the surge?

The heads of the 'Big Six' have been asked this question by MPs recently. A parliamentary business and enterprise select committee called on energy bosses in June to explain the rises and whether there are likely to be more.

The main reason, according to the chief executives, is the wholesale market.

"We are seeing a seismic shift in commodity prices," said Dr Paul Golby, chief executive of E.On told the committee.

"It's not difficult to see that the pressure is upwards," he added.

It is certainly true that wholesale market prices have increased dramatically. Since January, prices have risen to record highs with increases of up to 70 per cent.

The problem is partly due to falling gas production, as British reserves in the North Sea decline, means the UK is becoming more dependent on imports from Europe.

This is bought on the wholesale market and the price is linked to that of oil. As oil prices have almost doubled from a year ago, gas prices have also shot up.

At the moment, energy companies are absorbing some of this increase. According to Centrica, the parent company for British Gas, if the full cost was passed on to consumers, the average household bill would rise from £600 a year to £1000.

Energy companies will not be able to do this indefinitely and all the bosses agreed prices are going to increase further this year. The figure often quoted in the media is a further 40 per cent by the end of the winter.

What is being done?

A business and enterprise select committee has been investigating the market and has concluded a major overhaul is needed. Ofgem, the market regulator, is conducting its own probe, to be published in September.

The committee concluded there is a lack of liquidity in the wholesale gas market, which Ofgem should look into as a matter of urgency.

The link between gas and oil prices is a particular concern, the MPs believe, which could lead to yet higher prices.

Consumer watchdog energywatch agrees and has been campaigning for an end to the link. Graham Kerr of energywatch says: "If the cost of gas production has not increased then the contracts set by gas producers should be scrutinised to ensure they meet both the letter and spirit of European law."

Potentially, the Competition Commission could get involved and press for a reform of how contracts are agreed between gas producers and suppliers to endure consumers do not end up paying over the odds.

The select committee also had concerns about competition in the market, and the fact that price increases from the major suppliers tend to come within months of each other has not gone unnoticed.

Although the committee found no evidence of collusion between the companies, the report noted "in a retail market dominated by six major players, it is easy for those players to make informed judgements about the behaviour of their competitors" and "this alone can distort competition".

"The regulator therefore needs to remain very watchful," the MPs warn. Increasing the number of suppliers on the market could potentially lead to improved competition and a better selection of tariffs. Again, Ofgem is looking into this and will publish its findings in September.

What can I do?

Although clearly there are issues with the way energy is bought and sold that must be addressed before prices come down, there are still things consumers can do to reduce their bills.

Reducing the amount of energy you use is an obvious one but could save you cash, as well as improving your carbon footprint. However, before you rush out to buy a wind generator or solar panels for your roof, give your local council a ring and see what they can offer in terms of grants – many will help towards the cost of insulation, for example. Cavity wall insulation can potentially save you between £50 and £100 a year.

Switching the way you pay bills – paying by direct debit will generally get you a discount – will help, while switching suppliers could save you £100 a year on average on your bills. There are several websites that can help you with this.

For those who are really struggling, consider whether you are eligible for a social tariff. These are special tariffs available to households with low incomes and you can apply for them by ringing your supplier. You may be able to save more by switching, however, so it is still worth looking at this first.

Finally, many money saving experts are recommending capping your tariff. According to online comparison site Confused.com, capped rates - or fixed price deals – can protect consumers from future price fluctuations.

"The current pick of these is Scottish Power's Fixed Price Energy, as prices are guaranteed not to rise until August 31 2009. Although this is nearly 20 per cent more costly than Click 5 from British Gas - the best non-capped deal - it could turn into a bargain in the not-so-distant future, if prices continue to rise," the website advises.

David Kuo, head of personal finance at Fool.co.uk agrees. "We again urge customers to switch to capped-rate tariffs, and to choose one that lasts the longest. According to energy comparison website Xelector, household energy bills will be 50 per cent more expensive by February 2009, while capped-rate tariffs are currently around 15 per cent higher.

"Consumers rarely get a chance to outwit the utility companies, but failing to switch to a capped-rate deal is tantamount to lighting your boiler with five pound notes."

So take whichever route suits you best – but take action now to protect yourself from the threat of rising bills.