Energy firms dispute Ofgem profitability figures

 

Ian Marlee, Ofgem: "The job we have been given to do is to make sure the market is working effectively."

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Energy suppliers have criticised figures from their regulator, showing that their profitability has soared.

Ofgem said that the profit margin for energy firms had risen to £125 per customer per year, from £15 in June, but suppliers said that was misleading.

The figure is a snapshot of how much suppliers would make from dual-fuel customers if energy prices and bills stayed unchanged for the next year.

Ofgem also said it would force suppliers to simplify tariffs.

Rising bills

"A snapshot of profits every few months does not provide a realistic picture of the average profits over a year of companies in the sector," said Christine McGourty, director of Energy UK, which represents energy suppliers.

"It is the rising cost of wholesale energy that has contributed to the increase in customers' bills this year."

Christine McGourty, director of Energy UK: "Ofgem data published today shows that we have a very competitive market."

The profit margin has risen because, since June, the providers have raised prices by more than the increase in wholesale energy costs.

However, Ofgem predicts that energy firms' profit margins will fall to about £90 per customer next year as wholesale prices continue to rise.

The profit margin is a volatile measure, and indeed showed the providers losing money for much of the time from 2004 to 2009.

"The approach adopted by Ofgem in calculating this figure is entirely theoretical and does not reflect how a responsible energy supply business manages its energy procurement strategy in reality," said SSE, which estimates its profit margin at £62 per customer.

British Gas said it had made £24 after tax per dual-fuel household. It said that Ofgem's methodology was "flawed excluding, as it does, the discounts we give our customers and the benefits they receive from fixed price contracts, as well as understating our commodity costs".

But Ofgem said that the suppliers were "comparing apples with pears" and expressed concern about the transparency of the accounts from which suppliers have taken their own profit figures.

Single figure

In addition to the profit figures, Ofgem also published its simplification plan, under which suppliers would be forced to have no-frills tariffs. These would consist of a standing charge - fixed by the regulator - plus a unit charge for energy used.

Analysis

In addition to the new simple tariffs, companies will still be allowed to offer an almost infinite range of fixed rate deals, similar to mobile phone contracts.

Though complex, those deals may end up cheaper than a standard rate, especially if they are tied to the planned roll out of smart meters.

These complicated deals may also offer greater savings to households that can afford special devices designed to use more electricity when the price is low.

It's exactly that type of complexity which has put many lower income households off switching to cheaper tariffs, a problem Ofgem is trying to solve.

The coming consultation will give the regulator a chance to see if it can be fixed, perhaps by making all tariffs - even smart meter deals - directly comparable on the same terms.

It means that the only number consumers would have to compare between suppliers would be the unit energy charge.

"The process of trying to switch from one supplier to another is hideously complicated - very off-putting even for quite intelligent people," Tim Yeo MP, chair of the Energy and Climate Change Committee told the BBC.

He also criticised the rise in profit margins to a three-year-high as, "evidence of absolutely crass behaviour by the energy companies, with a jump in prices announced in the last few months ahead of what will be a winter in which most families face their highest ever electricity and gas bills".

Under Ofgem's simplification plan, more complicated tariffs would still be available, but they would have to be for a fixed period, with price increases not being allowed for the duration of the deal.

The regulator will publish its detailed proposals for consultation next month and hopes to have implemented some of its reforms in time for winter 2012.

The average dual-fuel bill is now £1,345 a year following recent price rises from all the big suppliers.

"When consumers face energy bills at around £1,345 they must have complete confidence that this price is set by companies competing in a fully competitive market," said Ofgem's chief executive Alistair Buchanan.

"At the moment that is not the case."

Energy UK said the industry was already working on improving the situation.

"Companies are already looking closely at the structure of tariffs and at the information provided on bills and are developing ways of making them easier for people to understand and compare so that people can ensure they are on the best deal for them," said Ms McGourty of Energy UK.

"People who are worried about bills this winter may be able to save money by switching to pay by direct debit or shopping around, especially if they have never switched before."

Wholesale markets

In addition to trying to boost competition by simplifying tariffs, Ofgem is looking at how to reform the wholesale energy markets, which are the places suppliers go to buy their energy.

Ofgem wants to reform those markets to allow greater competition with the big suppliers and will publish proposals in December.

The bigger suppliers have an advantage because they generate their own power, selling most of it to consumers, with little of it going to wholesale markets.

But earlier in the week one of the big providers, SSE, announced plans to auction all of its power on the open market.

Ofgem has proposed that utilities must auction 20% of their electricity by 2013.

Industry bodies and consumer groups have been invited to Westminster on Monday by Energy Secretary Chris Huhne to discuss ways in which consumers can save money on their bills.

 

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  • rate this
    -68

    Comment number 631.

    As a public sector worker, I don't mind paying the bills as I know many private sector workers pension funds invest in the utilities and so benefit when they have profits.

  • rate this
    +20

    Comment number 615.

    Each year I try to use less energy....each year I try to insulate and upgrade to be more efficient...each year my bills go up.
    The Govt especially 'speedy huhne' tell me I should do this but the Govt don't tell the energy companies to drop their prices!
    Also why do I have to pay a different price for different bits of gas that come to my house depending on usage...I thought it was all the same.

  • rate this
    -55

    Comment number 456.

    Sky and Virgin Media make a lot of money out of customers, are they a neccessity in customers properties? Do customer complain about their profits? If customer stopped depending on the luxuries in life and started understanding that the economy is in a bad shape and times are hard and started prioritising their bills in their properties to their neccessities then we could all be more efficient.

  • rate this
    +68

    Comment number 402.

    The NHS recommends rooms do not go below 16 degrees - in a few weeks people will need to turn their heating on to stay above this. Last Christmas I returned home to find my bedroom was 3 degrees!
    People HAVE to turn their heating on and I believe energy companies should be threatened with manslaughter charges for the people who will die this winter because they can’t afford to.

  • rate this
    -127

    Comment number 371.

    For those of you who are slamming the free market and complaining about price rises, do remember that higher profits for the energy companies means higher tax revenues and therefore more public money...it's just a different way of refilling the coffers...

 

Comments 5 of 18

 

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