Business

Energy firms dispute Ofgem profitability figures

  • 14 October 2011
  • From the section Business
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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."

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.

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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