Household energy bills are rising – get ready to switch
This time last year, energy prices were just starting to recover from the record lows reached in the weeks before.
Worldwide lockdowns at the onset of the pandemic saw international trade practically grinding to a halt.
Economists and analysts were predicting the most severe downturn since the Great Depression in the 1930s.
Oil prices in the US actually went negative for a time.
As a result, energy prices fell precipitously, but what a difference a year can make.
Oil prices are now back at their pre-pandemic levels – helped along by a few intermittent crises such as the Suez Canal blockage and a cyber-attack that saw a key oil pipeline in the US shutting down for over a week.
Coal and gas prices have also been rising.
In tandem with those moves, home energy providers have been hiking their prices with some moving more than once in recent months.
And with the introduction of smart metering and more people getting their properties insulated (and thus reducing the cost of running their homes), energy companies will be keen to capitalise where they can.
Shopping around is more important than ever.
What makes up the cost of an energy bill?
Almost half of the bill is made up of the fuel generation cost – in other words, the source of the energy.
Despite making great strides towards reducing our reliance on fossil fuels in recent years, around half of our electricity output is still generated from burning gas and up to 15% from burning other fuels like coal and oil.
So, the pricing structure is highly dependent on movements on the commodity markets, which, as already outlined, are all heading in one direction – upwards.
Daragh Cassidy, Head of Communications with the price comparison site, bonkers.ie said consumers had been hit with a ‘triple whammy’ of events on this front.
“The lack of wind energy output over the past few months, the shutdown of some back-up power plants for maintenance, and the rise in the price of coal and gas on international markets are just some of the reasons for the increases,” he said.
On top of that, there are the costs associated with building and maintaining the networks to get the energy to our homes.
All the suppliers pay a tariff to the network operators which typically amounts to around a third of the household bill.
For electricity suppliers, there’s the PSO (public service obligation) levy, which is set every year by the Commission for Regulation of Utilities (CRU).
The levy for last year increased to €88.80 (including VAT) from €38.68 the previous year.
The money collected from the PSO levy is now used solely to support the renewable energy sector here.
For gas suppliers, there’s the carbon tax, which was hiked by €7.50 at the start of May to €33.50 per tonne of carbon dioxide.
The remainder of the bills are made up of taxes and the supplier’s overhead costs, as well as a margin for profit.
“Customers are getting a battering from increases in unit prices, increases in the PSO levy (or carbon taxes for gas) and increases in the standing charges,” according to Brendan Halpin, founder of WeSwitchU, a price comparison and switching service for energy customers.
To what extent are prices rising?
In the electricity market, most providers have announced, or already implemented, price hikes of between 4% and 18%.
Electric Ireland, the biggest supplier of electricity, has said it doesn’t intend to increase prices for the time being. However, it did increase its electricity prices by over 3% last October when many suppliers froze theirs.
In the gas market, only Bord Gáis Energy has held prices steady in the latest round with the remaining providers announcing increases of between 4.5% and almost 10%.
“Some of these increases are fairly hefty and will hit households hard,” Daragh Cassidy pointed out.
“Energy prices are notoriously volatile so there’s no guarantee households won’t be hit with further increases later in the year unfortunately.”
And indeed some have already moved again.
Both Panda Power and Flogas announced a second round of hikes effective from later this month.
In a statement, Flogas said the price rises were as a result of the significant and continuing increases in wholesale energy costs.
“April 2021 saw the highest wholesale electricity prices since the new Single Electricity Market commenced in October 2018,” the company said in a statement, adding that ‘higher than usual prices are likely to continue for some time’.
It’s worth noting that we already have the fourth highest electricity prices and the seventh highest gas prices in Europe.
So, where are the savings to be made?
Like other utility providers, energy companies rely on a degree of inertia from their customers – or, to put it another way, some misplaced loyalty.
Electricity and gas suppliers tend to offer attractive introductory rates to get customers onto their books, but they generally hike the costs significantly after those periods conclude so it pays for consumers to be nimble and act every 12 months to avoid paying costly bills.
“It’s what I call the tease and squeeze model,” Brendan Halpin said.
“The supplier will tease you with the discount which you lose after 12 months. The only way to save money is to switch every year and that’s where a lot of people fall into the trap. They switch on year one and then forget about it and then they’re back onto the standard rate.”
It’s estimated that about six in ten householders have remained with their suppliers over the past five years.
That’s about a million households that are paying standard, or elevated, unit rates for their gas and electricity.
According to the energy regulator, the average consumer who switches utility providers every year and pays discounted rates could see their annual energy bills falling by €400.
Depending on the size of the house and its BER (Building Energy Rating), the potential savings could be even greater.
If the savings are so significant, why don’t more people switch?
It is surprising that more people don’t switch, but perhaps the recent hikes will give householders pause for thought and focus minds on making savings.
Moving energy providers is probably the most straightforward of all the utilities and there’s plenty of choice with 13 different suppliers in the market.
“You get exactly the same product when using and paying for your energy, although the customer service will differ,” Eoin Clarke, Managing Director of price comparison site Switcher.ie said.
“By paying more you are simply giving away more of your hard-earned cash than you need to.”
Brendan Halpin said a large proportion of consumers who do make the switch simply forget to do so again a year later.
“They don’t really see it because the bill comes every two months. There are often estimated readings, which was really a problem during the pandemic, but it’s something customers simply have to keep an eye on.”
WeSwitchU offers a service whereby they make the switch on behalf of consumers who have registered with them.
They find the most suitable plan for the consumer upon joining, they monitor the household energy usage over the 12-month period and then recommend the best plans to move to at the end of the year.
Needless to say, it is not a hugely popular service among the energy providers as the consumers are constantly moving, but for consumers the savings can be significant.
WeSwitchU operates by charging a percentage of the savings that consumers make.
Shouldn’t householders be trying to reduce energy consumption?
This is the ultimate aim.
By switching to renewable sources of energy and making homes more energy efficient, we’re helping to reduce the amount of carbon dioxide that’s being released into the atmosphere through energy generation.
And with the introduction of smart metering, householders are being rewarded for making more energy efficient choices.
Which means that providers will make up the difference by effectively penalising those householders who don’t.
Although there are very attractive grants and supports available to make homes more energy efficient, not everyone is in the position to make such an investment.
However, there are simple changes that people can make to reduce their energy consumption, such as blocking drafts through doors and letterboxes, turning off appliances at the plug, and bleeding the radiators.
“If you’re working from home, check if your employer will contribute towards your bills. If not, you may be eligible for tax relief,” Eoin Clarke suggests.
Should renewable sources not make energy cheaper?
This is what baffles a lot of people.
At a time when more wind and solar power plants are appearing on the landscape, why are energy prices not falling?
Wind and sun, after all, come free of charge.
The government intends to have 70% of Ireland’s electricity generated by renewable means by 2030, the bulk of it coming from wind and solar.
But that requires a significant investment in the infrastructure, the cost of which is estimated at between €500 million and €2 billion.
That will be funded through higher tariffs on providers, which will ultimately be recouped from the consumer though higher prices.
And then there’s the requirement for an alternative supply if nature doesn’t cooperate.
“The problem with renewables is that it’s intermittent. You always have to have a backup,” Brendan Halpin explains.
“If the wind doesn’t blow, you’ve to use a conventional power station. They’re mainly driven by gas. If the price of gas goes up, generating that electricity is going to cost more.”
In short, it doesn’t look as if energy prices are going to fall any time soon. In fact, they are likely to keep on rising.
The solution – aside from making some changes to reduce consumption – is to monitor the market and keep on switching.