Ofgem’s Supply Market Indicator for January 2015

Today Ofgem has published its latest supply market indicator (SMI). The SMI is published on the last Thursday of each month.

The SMI is a 12-month forward look at cost trends in the domestic energy market. It looks at the average annual household bill and estimates the annual cost per customer faced by a typical large supplier to deliver gas and electricity. Ofgemís goal in producing the SMI is to make the relationship between the costs faced by energy suppliers and household consumer bills more transparent and accessible. This makes the market clearer for consumers.

The SMI does not represent any one particular supplier. It includes an estimate of a typical large supplierís pre-tax margin. This is not a statement of current or future profits.

The actual pre-tax profit earned by any large supplier will depend on a variety of factors. These include a supplierís chosen hedging strategy, cost efficiency and actual consumption levels. Demand for energy is affected by weather, especially in gas. Suppliers also still have to pay taxes and fund debt payments from the margin they make. Reporting margins in this way is common across various sectors.

Information on the historical costs and revenues of the large suppliers can be found in their Consolidated Segmental Statements (CSS).

The latest indicators for January show that:

Our estimate of the average dual fuel bill for the next 12 months is £1,305 down from the November 2014 estimate of £1326. This assumes seasonally normal demand. It also takes into account the price cuts to variable tariffs announced by the six larger suppliers in recent weeks, as well as the introduction of a number of cheaper fixed tariffs to the market.

We estimate that wholesale gas and electricity costs for the next 12 months will be around £574 or 44 per cent of an average dual fuel bill. This is £13 lower than Novemberís estimate. The equivalent estimate a year ago was £636. This reflects the significant downward shift in forward prices over the past year.

We estimate that network costs for the next 12 months will be £297 or approximately 23 per cent of the average dual fuel bill. This is £8 lower than Novemberís estimate. This is due to the impact of Ofgemís price control for electricity distribution companies.

Our estimate of the cost of environmental and social obligations for the next 12 months is around £93 or approximately 7 per cent of the average dual fuel bill. This is around £2 higher than our November estimate.

Our estimate of supplier operating costs for the next 12 months remains broadly the same as last year at £176 or around 13 per cent of the average dual fuel bill.

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.

The SMI analysis is available in full at Supply Market Indicator.

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