Ofgem Predicts Profits for Energy Suppliers


January 2015

Ofgem Predicts Profits for Energy Suppliers

The regulator Ofgem has released a report which forecasts a rise in the earnings for the big energy suppliers. They are said to benefit from a pre-tax gain of £114 per customer, a figure which is £9 more than the regulator predicted in November 2014.

This is largely the result of the crash in oil prices worldwide by roughly 50%. The predicted profit margin includes the reductions in gas prices that the suppliers have made in recent weeks, which range from the 1.3% by EDF to the 5.1% given by npower.

In addition, customers are set to benefit and see a decrease in their energy invoice per annum. Some may be tempted to turn up their heating as we move into the last month of winter - Ofgem have stated that the average dual-fuel bill for energy consumers will fall by £21. This means an average price per year of £1,305.

In news that is undoubtedly set to increase dissent amongst consumer and political groups, the regulator has effectively published figures that intimate the big energy providers are failing to pass on the wholesale prices that they have benefited from in the last twelve months.

The chief executive of Ofgem, Dermot Nolan, informed the Energy and Climate Change Committee that these profits for the large energy companies were ìclearly cause for concern.î

He stated: ìThere 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.

Furthermore, he said: ìIn theÖmarket report we published last year, we found strong evidence that actually said wholesale prices rise and retail prices move quickly but that actually they donít fall in the same way.î

The ìbig sixî - British Gas, Scottish Power, npower, SSE, EDF and E.ON - have issued rebuttals to these criticisms. They follow a line of argument that maintains they can only drop the prices for customers so much because they have to buy raw energy supplies in advance, in some cases three years before.

Moreover, they claim that wholesale costs only make up 50% of the total cost of supplying energy. They contend that they have to consider other expenses such as increasing network investment charges and government schemes such as green energy tariffs.

This is indicative of an ongoing tension between Ofgem and the energy industry which started in 2009 when the regulator began the process of publishing statistics concerning the industry. The criticism from the body of energy suppliers is that Ofgem publications often misrepresent their profits.

The chief executive of Energy UK, Lawrence Slade, commented on the recently published figures that they had ìproven to be unreliable.î

Mr. Slade said that the regulator ìÖtakes 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.î

Political discontent over this issue is pertinently represented by Scottish Labourís shadow energy minister, Tom Greatrex, who chastised the government for not giving Ofgem the power to enforce a reduction in bills.

He said: ìThey had the chance to stand up for millions of families. Instead, they stood up in favour of the energy companies. They now have no one else to blame for the failure of energy companies to pass on the full savings from wholesale costsÖî

Many have further criticised the fact that energy companies and Ofgem cannot seem to agree on the nature of the market and the extent to which it is viable for companies to pass on wholesale price reductions to their customers.

One thing is for sure- this issue will gather momentum in the next few months as we move closer to the general election and many people will gravitate to the party that presents the most attractive energy policy.

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