Energy Prices

We understand the effects that changing energy prices have on our customers’ daily lives and we’re committed to helping our customers reduce the amount of energy they use. We offer specialist energy efficiency advice, which can reduce the costs of bills.

Our aim is to protect our customers from the volatility of the wholesale markets as much as possible through the effective purchasing and hedging of our wholesale costs and risks. We purchase the energy we supply weeks, months and sometimes years in advance, allowing us to smooth out prices.

However, energy bills are not made up solely of wholesale prices. There are a whole range of factors to include, from the costs of getting the energy from power plants to homes, to the cost of environmental schemes. These costs continue to rise and, in December 2010, we announced a price increase of 5% for gas and electricity, which took effecting January 2011. The increase did not include customers on our social tariff, as we made a commitment not to increase their prices until April 2011 at the earliest.

During 2011, the cost of wholesale power and gas increased significantly, along with other elements that make up a domestic energy bill. Global events such as the earthquake in Japan and unrest in the Middle East pushed up prices in the wholesale market, and in August 2011 we announced that we were increasing our prices by 12.2% for dual fuel customers (15.7% gas; 7.2% electricity). We made a commitment not to increase prices again until the end of Winter 2011/12 and, in January 2012, were able to pass on a reduction in wholesale gas prices to our customers, announcing a 5% reduction in domestic gas prices at the beginning of the year.

We recognised the need to protect our most vulnerable customers of society from increasing prices, especially during the winter months. The key issue is identifying those who are the most vulnerable and making sure they get help. We wrote to all of our customers in Autumn 2011 to provide them with information on the best ways to save money, improve energy efficiency, encouraging any customer to get in touch to see how we can help if they are struggling with energy costs.

To comply with new Ofgem regulation, 30 days before the price increases took place we wrote to our customers to explain what the price increase meant for them, allowing time for customers to seek advice and make an informed choice about the best option for their individual needs.

Competition

In 2010, Ofgem announced an investigation into the retail energy market, to review whether the margins that energy suppliers make are at an acceptable level and to ensure that the market is working in favour of customers.

The UK has one of the most competitive energy markets in the world, with consumers able to choose from a wide range of suppliers, products and services. All energy companies are facing the same pressures, so it is not surprising that prices often move in a similar direction. Ofgem’s own analysis has shown that in recent years energy companies made a loss on customers’ bills.

We continue to work closely with Ofgem to ensure the market is working effectively in every way possible and welcome the opportunity to ensure all customers can take advantage of the competitive market and profit from the different tariffs and energy products available to them.

Profit

One of the main goals of our business activity is to increase the company's value. In order to accomplish this, we must earn a return on our capital employed (ROCE), which exceeds the cost of capital. In 2011, our ROCE was 6.9%, a slight increase from 2010, but still falling short of our cost of capital, which was 9% before tax.

In order to meet the significant levels of investment required to keep the lights on and meet carbon reduction targets, energy companies do need to make a reasonable level of financial return. We are investing in new, low-carbon energy to help secure a reliable and safe supply for the future; for example, RWE has invested billions into new generation over the past few years, including the £1 billion investment in a new 2,000MW gas-fired power station at Pembroke, South Wales, due to be operational by the end of 2012.

To continue these levels of investment, it is important that we are able to make a reasonable level of profit, whilst continuing to offer our customers best value for money and striving to ensure we deliver on our targets. We also fundamentally believe that any new energy policy must deliver change to the current energy market structure and regulations at the lowest cost to the consumer.