Warning on energy profit margins

Published: Thursday 26th March 2015 by The News Editor

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Britain’s Big Six energy firms stand to make increasing profit margins from households amid falling wholesale gas and electricity prices, according to analysis by regulator Ofgem.

Its latest Supply Market Indicator (SMI) estimates that firms could earn a margin of £118, or 9% of an estimated annual dual fuel over the next 12 months, up £5 from its previous estimate.

Overall bills themselves are expected to be £1,295, £6 lower than the figure pencilled in last month, and £60 less than the total expected a year ago following cuts to gas tariffs announced earlier this year.

Wholesale gas and electricity costs are expected to be £80 less than they were estimated at a year ago, with some other costs flat or slightly higher.

Ofgem stresses that its estimate of a typical supplier’s pre-tax margin is not a prediction of a supplier’s profits, which can be altered by a variety of factors including the way it buys energy for future use, cost efficiency and consumption.

This demand can be affected by unpredictable weather patterns, especially for gas. Profits are also affected by taxes and payments needed to service debt.

But any indication that big energy suppliers are making fatter profits from households has the potential to add to political pressure on the sector, with Labour planning to freeze tariffs and give Ofgem the power to cut them if it wins the next election.

The way the regulator calculates the SMI has been criticised by the industry with Sam Laidlaw, former chief executive of British Gas owner Centrica, last year pointing to “deficiencies” in the “theoretical analysis”.

The sector is currently being scrutinised by a full-scale competition probe. Early findings last month showed big suppliers were overcharging millions of loyal customers by up to £234 a year.

:: In a separate announcement today, Ofgem called on gas network operators to connect more customers to the gas grid, where it is the cheapest option for fuel-poor consumers, as gas remains one of the cheapest forms of energy.

Ofgem said the companies could do more to connect eligible households to the gas grid than the 77,000 originally planned for between 2013 and 2021.

Gas network operators include National Grid, Wales & West Utilities, SSE and Northern Gas Networks.

Published: Thursday 26th March 2015 by The News Editor

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