Energy providers have been accused of profiting at the expense of consumers, after new figures from industry regulator Ofgem revealed that retail profit margins have doubled in the last 18 months.
The data shows that the Big Six energy suppliers – SSE, E.ON, British Gas, EDF, npower and Scottish Power – enjoyed a 7% profit margin on average annual dual fuel bills last year.
Average annual energy bills in the UK now stand at £1,420, compared with the average bill dual fuel bill of £1,030 recorded in 2011, when the profit margin was just 3.2% – less than half the current rate.
Ofgem estimates that energy suppliers now make an average of £95 on each household’s energy bills, but anticipates this will rise to more than £100 by the end of the year.
The publication of the figures has seen energy suppliers come under a great deal of fire, with the campaign group Fuel Poverty Action a particularly vocal critic.
The organisation – which fights for a fairer deal for consumers on their energy bills – says that many people may be left with the conundrum of whether to heat their home or eat this winter.
“This cold-blooded profiteering has to stop, but piecemeal market reforms will not go far enough, especially given the threat of a dash for gas that will send bills through the roof,” the organisation stated.
Only recently, Ofgem released figures showing the total net margin for energy suppliers was £115, up from £40 last year – an increase which is at odds with what energy companies claim, according to shadow energy secretary Caroline Flint.
“Energy companies always claim that when they put up people’s bills they’re only passing on increased costs. What these figures show once and for all is that energy companies have increased their profits on the back of spiralling bills for hard-pressed consumers,” she said.
“These companies like to pretend they are the victims of wholesale prices, but they have been allowed to arrange their businesses in a way that enables them to make huge profits, whatever the cost of wholesale energy.”
Other data published by Ofgem shows that the Big Six suppliers enjoyed a 24% profit margin from power generation in 2011, which is believed to have increased further in 2012.
When questioned on the data, British Gas’ parent company Centrica said its post-tax profit margins on the retail market had stood at around 5% for the past five years, which is the equivalent of around £50 per customer.
The higher wholesale margin was due to the company’s investment in projects such as new power stations, a company spokesman claimed, adding that forward contracts for up to £50 billion of new gas supplies also had an impact.
SSE, meanwhile, pointed out that all energy companies operate retail as a standalone business, claiming that cross-subsidising energy supply with profits from the wholesale business could create an entry barrier to the market and ultimately have a detrimental impact on healthy competition within the industry.
“We expect to make a profit margin of around 5% in energy supply over the medium term, which we believe to be fair and sustainable,” the supplier added, which is in line with Centrica’s expectations.
However, smaller energy suppliers outside the Big Six have argued that the domination of the market by larger companies will continue to exacerbate the impact on consumers.
Ed Kamm, chief marketing officer at First Utility, a small energy provider, told the Guardian: “The control the Big Six have over the wholesale market makes it difficult for independent suppliers to compete on price, which ultimately harms consumers.
“The Big Six firms’ generation margins are nearly 25% and increasing because they are not exposed to the market pressures which drive efficiency unlike other truly competitive industries. This is bad for competition and, ultimately, bad for consumers.”
Ofgem has reiterated its desire to shake up the market; a vow initially made earlier this year after each of the Big Six suppliers increased prices between October and January, blaming rising wholesale power costs.
By forcing companies to release their internal figures earlier, the regulator claims it will encourage greater competition, which will subsequently lead to a simpler, clearer and fairer market that works in the favour of consumers.
“To achieve this we propose to cut down the number of complex tariffs and simplify their structure. This will make it easier for consumers to find a cheaper deal,” Ofgem explained.
“We also want to introduce other major changes to increase competitive pressure on suppliers. Our reforms are due to take effect from this summer.”
While the Big Six continue to justify their profit margins, it is clear that the industry regulator, campaigners and smaller energy firms will continue to fight for a more transparent and, ultimately, fairer market.