It doesn’t know what it’s doing: Centrica rails at energy watchdog
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Thursday 31 July 2014
The growing row over future energy company profits has been further inflamed by the owner of British Gas.
Centrica’s finance director, Nick Luff, used the announcement of a 40 per cent fall in half-year profits to launch a diatribe against the industry regulator Ofgem, which had caused a storm on Wednesday by predicting that the Big Six energy companies will double their profit margins over the next year.
“Ofgem does some theoretical calculations with a range of assumptions, but its figures for the last 12 months haven’t come true and it’s very hard to see how their numbers for the future could be correct,” said Mr Luff, who leaves Centrica next month after seven years.
He claimed there are 25 independent analysts covering Centrica and not one is forecasting that British Gas’s profit margins will go up. “Ofgem’s figures are unhelpful,” he added.
Centrica said it expected average bills to fall by 7 per cent, or £90, this year, although that is due to lower usage rather than lower prices.
The argument with Ofgem centres on the regulator’s Supply Market Indicator (SMI), which was set up to help consumers understand what could happen to the different costs that will make up their bill for the next 12 months.
The latest SMI, published today, showed that the estimated margin before tax for a large supplier over the next year will rise from £101 to £106.
That suggests the average energy company profit margin on household bills is 8 per cent – a figure that has almost doubled in a year due to falling wholesale and environmental costs, according to Ofgem.
The watchdog has told suppliers to explain to consumers why, when wholesale prices are falling for this winter, they are not seeing cuts in prices.
It was Ofgem’s concerns that savings were not being passed on to customers that led it to refer the energy market to the Competition and Markets Authority for investigation.
Ahead of Mr Luff’s comments, Angela Knight, the chief executive of Energy UK, said: “Using estimates that are as inaccurate as these, and which often result in misconceptions and misunderstandings, gets us nowhere.”
Tonight one of the “challenger” energy companies joined the fray. Ecotricity’s founder, Dale Vince, said: “Ofgem has a track record of getting these numbers wrong. Last January it predicted a £120 profit for the Big Six, revised the figures down to £28 and the actual outcome was £53.
“Ofgem knows energy companies buy power at least 12 months in advance. Therefore its figures are utterly misleading. Ofgem claims to champion simplicity and transparency in the energy market – these figures are over-simple and anything but transparent.”
But consumer groups hit back at the energy providers and attempted to retrain the focus on high bills. Citizens Advice’s chief executive, Gillian Guy, said: “Suppliers keep shifting the responsibility for what’s causing rising prices, leaving consumers struggling to understand why the prices they pay remain high when the biggest chunk of costs that suppliers face continues to fall.
“It only goes to reinforce why the Competition and Market Authority’s inquiry is so important in order to establish if people are paying a fair price to heat and light their homes.”
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