Energy companies boost profits despite gas price cuts, warns energy watchdog

Critics brand revelation the final straw for consumers with Ofgem calling on competition watchdog to take widening profit figures into account

Energy companies are using the falling price of gas to increase their profits to £114 a household despite a recent wave of price cuts, the industry watchdog has warned.

The average pretax profit for a big supplier from a household bill will rise by £9 to £114 over the next 12 months, Ofgem said.

Average expected profits have increased by £37 in the past year while the cost of gas in wholesale markets has fallen by £62, Ofgem’s supply market indicator (SMI) report showed.

Dermot Nolan, Ofgem’s chief executive, said this week that rising profit margins were “clearly a cause for concern” and that the competition regulator should take the figures into account in its continuing inquiry into the market.

EDF was the last of the big six providers to announce a price cut on Tuesday. Its 1.35% reduction was the smallest while npower’s was the biggest at 5.1%. After price cuts by the large suppliers, the average forecast dual fuel bill over the next year has fallen by £21, or 1.6%, to £1,305 since November, Ofgem said. However, the figures show that the big six – which also comprise SSE, Scottish Power, British Gas and E.On – are still managing to increase profits.

Gillian Guy, chief executive of Citizens Advice, said: “The inadequacy of recent energy price cuts is now clear. Low wholesale costs are allowing energy companies to increase profits whilst barely cutting energy prices. The ball is now back in the energy firms’ court to actually compete with each other on further and deeper price cuts. Households that are struggling to pay their bills will rightly be angered that falling wholesale costs are being passed on more quickly to shareholders than customers.”

Wholesale gas prices have fallen more than 20% since early December following the halving of the oil price since the summer. Energy suppliers typically link gas prices to oil prices in their long-term supply contracts.

The big six have long faced criticism for imposing large price increases on consumers when market prices rise and failing to pass on all the benefits when wholesale prices fall. Ofgem said last year it had found clear evidence that this was industry practice and referred the industry to the Competition and Markets Authority.

Ofgem said: “Our latest supply market indicator suggests that the pretax margins of a typical supplier are likely to widen over the next 12 months as wholesale costs continue to fall sharply even when accounting for recent price cut announcements. If the market were more competitive you would expect suppliers to be competing more vigorously for market share in response to falling wholesale costs.”

Energy UK, which represents the energy companies, rejected Ofgem’s figures, describing them as outdated, statistically biased and inaccurate. The lobby group said research by the economic consultancy Nera showed Ofgem’s estimates consistently overstated profits, made mistaken assumptions about revenues and costs and assumed too high a level of energy consumption.

Energy UK’s chief executive, Lawrence Slade, said: “Ofgem’s SMI reports time and again have proven to be unreliable. Nera’s report shows that the SMI 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. It’s high time the SMI was abandoned.”

But Ofgem said it had no intention of ditching the SMI. Nolan told MPs he was confident the indicator was a reliable guide to the direction of company profit margins. The watchdog urged consumers to switch provider and said the best fixed rate deals on the market could save the average household up to £250.


Sean Farrell

The GuardianTramp

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