In from the cold: British Gas finally cuts prices

Critics say it's too little, too late - and urge other suppliers to quickly follow suit

Did you turn up the heating as the snow fell on Thursday morning? If so, British Gas's announcement of its first cut in energy prices for seven years must have seemed perfectly timed (though the reductions don't actually take effect until 12 March).

Credit where credit is due. British Gas - which has lost 2.7m customers, 14 per cent of its client base, in the past three years - is making significant reductions to the price of both its gas and electricity, as well as introducing an even better deal for vulnerable customers on pre-payment meters. Gas bills will fall by 17 per cent, while electricity is coming down 11 per cent. That's a £167 annual saving for the typical customer who buys both from British Gas.

However, the figures are worth setting in context. The average household's total gas and electricity bill topped £1,000 for the first time last year, having risen 72 per cent since 2004.

Moreover, price cuts could have come sooner. All energy companies, led by British Gas, increased their prices throughout 2005 and the first half of 2006 because the cost of wholesale gas rose dramatically. Yet in the second half, prices collapsed in the wholesale gas market - crucial for the cost of both domestic gas and electricity - ending 2006 50 per cent lower.

Energy suppliers buy their gas in advance, so customers were never going to benefit immediately from the collapse. Yet consumer groups want to know what has taken suppliers so long.

Much to campaigners' irritation, at least part of the delay seems to stem from the six big energy providers jockeying for position. Before Thursday, British Gas had already promised to cut prices "in the spring" while one of its rivals, Scottish & Southern, said last week that it also intended to reduce bills, though it has not said when and by how much.

"We need to see some action rather than simply good intentions," says Georgina Walsh, of the consumer watchdog Energywatch. "Wholesale prices have been low for so long that bills should already be falling."

Analysis from TheEnergy Shop.com, a company that helps consumers switch energy provider, suggests suppliers have never had it so good. The company's founder, Joe Malinowski, believes British Gas's full-year results, to be published on 22 January, will show it made record profits in the second half of last year, having lost money during the first half.

Its best estimate is that customers are currently paying an average of around 2.8p for each kilowatt hour of gas, while suppliers are being charged around 1.2p on the wholesale market. The current price at British Gas is closer to 3.1p, TheEnergyShop.com reckons, or 2.3p if all costs other than acquiring the gas itself are stripped out.

Profit margins are just as robust in the electricity sector. The average domestic buyer pays more than 11p for each kilowatt hour of electricity. Around 4p of that is accounted for by suppliers' costs, other than the cost of generating electricity, which is now below 4p, following the fall in gas prices. So the typical customer is financing a 27 per cent margin for his or her supplier.

These figures suggest there is plenty of room for a price war. British Gas may have stolen a march on its rivals this week, but it is unlikely to be the only company delivering price cuts.

Jeff Slaughter, head of home services at online price comparison site uSwitch, wants British Gas's competitors to declare their hands. Consumers have lost out because energy suppliers have been watching each other, he says, rather than concentrating on customers.

"We'd like companies to be as specific as possible about what they're going to offer customers and when," he says. "The time for price cuts is now."

Every day that prices stay unnecessarily high causes more damage, critics argue. Especially as consumers are paying top dollar when they're using most energy - bills are always highest in the first quarter of the year.

To switch or not to switch?

* With energy providers playing a cat-and-mouse game on price cuts, customers have a dilemma. Should they change gas and electricity supplier straight away, or hope their current providers will cut prices by more than rivals in the months ahead?

* "There is a case for waiting to see whether a price war develops over the next few weeks," advises Joe Malinowski, of TheEnergyShop.com. "I think there will be better propositions available sooner rather than later."

* British Gas's price cuts make its prices for both gas and electricity much more attractive, for now at least. But if you're with British Gas, don't assume you're paying its best prices. Its Click Energy 2 tariff is now the cheapest dual fuel - gas and electricity combined - deal going in the UK, but most customers aren't getting it. The good news is that existing customers can switch to Click, if they do so via an online price comparison service.

* Malinowski is convinced that by 12 March, when British Gas's price cuts take effect, other providers will have followed suit - and that there will be plenty of cheaper deals. It's worth seeing who offers what before deciding on your switching tactics, he says, particularly as you can't get the new British Gas prices for a few weeks.

* In the meantime, this is the most expensive time of year for energy. It may be possible to save money even before the price cuts, if you're currently paying bills by cheque or cash. Switching to direct debit will get you an automatic price cut.