Energy profit ‘up to £114 per home’

Published: Thursday 29th January 2015 by The News Editor

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Energy companies stand to increase their profits to £114 per household over the next year, even after cutting tariffs in response to dramatic falls in wholesale prices.

Ofgem’s latest supply market indicator (SMI) suggests firms will make a £114 pre-tax margin per household over the year – up £9 on its November update and 9% of the average dual-fuel bill, driven by “significant declines in expected future wholesale costs”.

The regulator said it had taken the price cuts announced by all the major suppliers in recent weeks into account before releasing the latest figures, as well as the introduction of a number of cheaper fixed tariffs to the market.

It said: “Our estimate of the pre-tax margin a typical large supplier could make over the next 12 months, based on a 13-month rolling average margin, is £114.

“This is up £9 from the November 2014 update. The rise in the rolling margin is driven by significant declines in expected future wholesale costs.”

E.ON, British Gas, Scottish Power, npower, SSE and EDF have all announced cuts to their gas prices in recent weeks of between 5.1% and 1.3%.

The scale of the cuts have been criticised by consumer groups.

All have fallen well short of industry estimates, suggesting bills could be reduced by £136 a year if suppliers pass on the full drop in wholesale prices.

On Tuesday, Ofgem chief executive Dermot Nolan told the Energy and Climate Change Committee that he was predicting increased margins for energy companies, adding that this was “clearly cause for concern”.

He told MPs: “We are trying to get the message out that it is easy to switch and you can gain from switching.

“But there is the major question of whether and how wholesale cuts that have clearly occurred are being passed on. It is something we will continue to monitor and measure.

“One thing I want to do very, very clearly, as a regulator, is shine as much light into this area as possible, publish as much data, really put firms under the microscope in terms of saying ‘What have you done, what are the correct margins that are in place?’.”

Mr Nolan added: “The whole rocket and feather effect was one of the fundamental reasons we referred the market to the CMA (Competition and Markets Authority).

“In the state of the market report we published last year we found strong evidence that actually said wholesale prices rise and retail prices move quickly but that actually they don’t fall in the same way.

“We felt that we didn’t just have an opinion or point of view, we had strong statistical evidence.

“If this phenomenon is still going on, and Thursday may make it slightly clearer as to whether or not we believe that lack of responsiveness is still there, then I would see that as an ongoing problem and something that the CMA would be looking at very carefully.

“What they will do with that I don’t know but they are due to publish their interim conclusions in June.”

Energy Secretary Ed Davey said: “People want to see bigger savings on their energy bills – not bigger profits going to the Big Six.

“The big energy companies are facing record competition thanks to our reforms and their customers aren’t going to stick around if they’re not getting a fair deal. There’s never been a better time to switch supplier and save.”

Shadow energy secretary Caroline Flint said: “These figures show that the profits of the big energy companies are set to soar on the back of big reductions in wholesale costs and tiny cuts to household bills.

“The reason energy companies are not passing on falling wholesale costs is because the Tories and Lib Dems voted against giving the regulator the power to cut bills. They had the chance to stand up for millions of families. Instead, they stood up in favour of the energy companies. They now have nobody else to blame for the failure of the energy companies to pass on the full savings from wholesale cost falls to all consumers.

“The next Labour government is committed to making big changes in our energy market: freezing energy prices until 2017 so that bills can fall but not rise, and giving the regulator the power to force energy companies to cut their prices when wholesale costs fall.”

Citizens Advice said the recent price cuts were “clearly inadequate”.

The charity’s chief executive, Gillian Guy, said: ” The inadequacy of recent energy price cuts is now clear. Low wholesale costs are allowing energy companies to increase profits whilst barely cutting energy prices.

“The ball is now back in the energy firms’ court to actually compete with each other on further and deeper price cuts.

“Consumers need a better offer than the price cuts announced so far to show that energy firms are really passing on a year of falling wholesale costs.

“Households that are struggling to pay their bills will rightly be angered that falling wholesale costs are being passed on more quickly to shareholders than customers.

“Bigger savings can be made from switching than from the price cuts on offer but households that stay on standard tariffs must not be left out in the cold. Many of the consumers who do not switch are older or stuck with a second-class service on prepayment meters.

“For everyone to be confident they are getting a good deal the market must be truly competitive.

“The price cuts that have been offered should be carefully looked at by the Competition and Markets Authority investigation.”

Which? executive director Richard Lloyd said: ” Consumers will be questioning why their energy bills haven’t been slashed further at a time of rising profits and falling wholesale prices.

“The Competition and Markets Authority’s investigation must look at whether lower wholesale energy costs are passed on fairly, or whether a lack of competition leaves us all counting the cost.”

Published: Thursday 29th January 2015 by The News Editor

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