Business

Energy firm profit margins to rise, forecasts regulator

gas rings Image copyright Thinkstock

The energy regulator Ofgem says the big energy firms are likely to enjoy a small increase in their profit margins in the coming year.

At the same time, customers will see a small fall in their annual bills.

The forecast comes against the background of international oil prices falling more than 50% since last summer.

Ofgem forecasts that customers' average dual-fuel bills will now drop by £21 to £1,305 in the year ahead.

At the same time, the profit margin per customer of a typical large supplier will rise to £114, £9 more than Ofgem estimated last November.

The calculation takes account of the small cuts in gas tariffs announced by the big-six energy suppliers in the past couple of weeks.

The improved profit margins that firms can expect to make are because of further "significant declines" in the wholesale cost of buying gas and electricity.

Ofgem's figures suggest that the big firms have not fully passed on the fall in wholesale prices they have enjoyed in the past year.

A year ago the regulator estimated that wholesale gas and electricity costs would contribute £636 to an average customer's bill in the following 12 months.

That forecast contribution will go down, it now says, to £574 in the next 12 months - a drop of £62.

Other costs

Only 44% of a typical household bill is made up of wholesale energy costs.

Most of the rest is due to network charges, the cost of meeting environmental and social obligations, and the companies' own operating costs.

Taken together, these elements are forecast to be £6 lower next November for a typical dual-fuel bill, than predicted last November .

The energy industry has consistently disputed the accuracy of Ofgem's figures since it started publishing them in 2009, accusing the regulator of being misleading and overstating the industry's profitability.

Lawrence Slade, chief executive of the trade body Energy UK, said the figures had "proven to be unreliable".

"[Ofgem] takes no account of what energy companies have to pay out in financing costs, interest or tax but gives the misleading impression that there are massive profits to be made," he said.

The recent gas price cuts announced by EDF, British Gas, Npower, SSE, E.On and Scottish Power have varied from 1.3% to 5.1%.

Electricity tariffs have so far been left unchanged.


Analysis. John Moylan, BBC industry correspondent

Energy firms knew that these margins figures would spark a row.

Earlier this week Ofgem's chief executive Dermot Nolan told a select committee that he was concerned about suppliers' profits - he had seen these figures in advance.

Overnight the industry tried to pre-empt Ofgem's news.

It published independent research which criticised the monthly margin estimate as "outdated, statistically biased & inaccurate".

But whatever the merits of the £114 figure, it seems clear that the margins at the big suppliers are moving higher.

And that raises uncomfortable questions about the price cuts that have been passed on so far.

Ofgem introduced these Supply Market Indicators (as they are called) to shed light on the opaque links between wholesale and retail prices.

As Adam Scorer of Citizens Advice points out, it is an unedifying sight that nearly six years on, the regulator and the industry still cannot agree on the basics of costs, prices and profits.


Major energy suppliers' price changes
Supplier Change Date of change
E.On Gas: down 3.5% 13 January
British Gas Gas: down 5% 27 February
Scottish Power Gas: down 4.8% 20 February
Npower Gas: down 5.1% 16 February
SSE Gas: down 4.1% 30 April
EDF Gas: down 1.3% 11 February

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