23 Jun 14

Response to Ofgem regarding wholesale prices

Dermot Nolan

Chief Executive Officer


9 Millbank



20 June 2014

Dear Dermot

Wholesale costs

Thank you for your letter dated 4 June regarding falls in wholesale gas and electricity costs.

I would like to reassure you that EDF Energy is committed to re-building trust in the energy market. We wish to be seen by our customers as acting fairly, responsibly, and in their best interests. In 2012, we launched our “Customer Commitments”, our promise to customers that we will provide them with fair value, better service and simplicity, and we strive daily to ensure that we deliver on these.

I would first like to respond to your question regarding how we will explain to our customers the impact that recent changes in wholesale costs will have on our pricing policies. We already provide cost breakdown information to our customers annually and as part of any price change announcement. On our website we already publish segmental accounts and a customer friendly bill breakdown. In addition to these, we will publish a statement for customers on our website setting out our position in respect of the movements in wholesale and other costs. As you will appreciate, we are limited in the extent to which we can explain our costs for competition reasons.

EDF Energy’s Current Price Position

We operate in a highly competitive market where price is the key issue for customers in choosing their supplier. It is key to our strategy that our pricing policies attract new customers and retain existing ones. As stated, one of our Customer Commitments is to provide fair value and we have a strong track record in this respect. Of the major suppliers, we have had the cheapest standard variable prices for 49 out of the last 52 weeks and we also offer the cheapest short term fixed price tariff of any major supplier, with no early termination fees or hidden charges for calling us and a unique price promise (where we inform customers of cheaper deals available in the market).

Wholesale Energy Cost

You say that there have been “significant falls in wholesale gas and electricity prices” “over the past year or so”. I attach a graph (based on ICIS Heren data) showing wholesale prices for year-ahead gas and baseload electricity. While this shows that the wholesale gas price has fallen since the end of 2013, it does not show a significant fall in the cost of wholesale electricity.

We also attach a graph showing day-ahead wholesale gas and electricity prices (also based on ICIS Heren data). These show falls for both electricity and gas since the turn of the year. However, it would be very risky for us to leave our energy purchases so late, as this could lead to wildly fluctuating prices or profitability. To avoid such risks we purchase our energy over several years. In fact, we had already purchased most of the energy we predict our customers will use this year before the recent falls. The movements in the day-ahead market, therefore, have a very limited effect on our overall energy costs.

Looking Forward

For 2015, we currently estimate that our energy cost reductions will be outweighed by increases in regulated transmission and distribution charges, ROC, FIT and smart metering rollout costs. I am sure that Ofgem is already aware of these movements.

We believe that rebuilding trust is a matter for all stakeholders, not just suppliers and that Ofgem, together with the industry, could do more to better inform consumers about the drivers of energy costs to help reassure them that they are getting fair and competitive prices. As part of this, we believe that Ofgem should play a stronger role in providing consumers with a trusted, clear and consistent narrative on the way the complex energy sector operates and the full range of cost drivers that are reflected in consumer energy prices.

We would be pleased to discuss with you and your team the detailed analysis and cost modelling that our team carries out.

Yours sincerely,

Vincent de Rivaz