Energy suppliers have hit back at claims that they are profiting at the expense of consumers, claiming Ofgem’s profit estimates do not provide an accurate reflection of the truth.
Recent figures from Ofgem suggested that major energy providers’ profit margins have more than doubled over the last year, with the big six now making almost £100 on each customer’s energy bills.
However, the method used to calculate these margins has now come under attack from suppliers, who argue that it calculates profit margins to be far higher than they actually are.
Land of confusion
Currently, Ofgem uses supply market indicators (SMIs) which the regulator claims provide the latest information on energy prices and profit margins. However, Ofgem itself has also admitted that SMIs do not show profits, and energy companies are now asking for clarity on its stance.
Today, representatives from British Gas, npower, E.ON, EDF, Scottish Power and SSE will appear before the parliamentary Energy Select Committee to discuss energy prices and the profits that they are making as an increasing number of Britons slip into fuel poverty.
According to British Gas, the UK’s largest supplier of gas and electricity for domestic use, the SMI lacks verisimilitude and is by no means a comprehensive means of determining how much it is profiting from supplying people’s homes.
“Erroneous assumptions in Ofgem’s methodology materially overstate reported margins by around £35 – £75. Trust in the energy sector is being undermined as a result,” British Gas said, adding that the system used by Ofgem needs to be reviewed as a matter of urgency.
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This sentiment was echoed by SSE, with deputy chief executive Alistair Phillips-Davies claiming Ofgem’s methodology for calculating the cost of energy on wholesale markets is based on a “simplistic model” that is designed to estimate an average price for how much suppliers have paid to procure their energy over an 18-month period.
He pointed out that the regulator does not factor in discounts for prompt payments in its energy bill calculations, either.
“We estimate that on average this cuts the bill size by a further £6 per dual fuel customer. Other offers, such as discounted tariffs, are also not reflected in Ofgem’s figures, and are likely to reduce the average profit margin by another £12,” Mr Phillips-Davies elaborated.
“A quick comparison between Ofgem’s estimates and the segmental accounts – totaled for all major suppliers in 2010 and 2011 – shows that Ofgem’s estimated profit margins averaged £73 per customer over the two years, which is more than double the £30 average actually earned by suppliers per customer during this time.”
A trick of the tail
Ofgem remains defiant that its methodology is effective, but conceded that comparing historical data with the SMI is not an accurate means of cross-referencing figures.
“Our indicator represents a snapshot estimate of the prices that suppliers charge their customers and the costs that suppliers face – this gives an indication of profitability in the market,” the regulator stated.
“Our analysis is for a typical customer on a standard variable tariff. It is not an attempt to model actual profits of individual companies.”
Today’s committee meeting is set to see the big six vehemently defend their profit margins and call for Ofgem to amend the way it reports their estimated gains and the actual impact on consumers’ energy bills.