Ofgem calls for new year cuts to home energy bills

Gas and electricity firms dispute regulator's analysis of profit margins
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The Independent Online

Energy suppliers are making more money from household customers, with margins doubling in the past year, Ofgem disclosed yesterday.

The industry regulator said gross margins, which include costs such as marketing and IT as well as profits, rose to £210 per dual-fuel customer in November, up from £160 in August.

In its quarterly energy report, Ofgem added that the figure would rise by a further £70 in the next six months unless suppliers cut their prices.

Ofgem added that its analysis of profit margins, using information from the companies during last year's market probe, showed that profits had not been excessive.

For the big six energy firms – British Gas, E.ON, EDF Energy, Npower, Scottish and Southern Energy and Scottish Power – higher household bills had been offset by lower generation returns caused by faltering economic demand and lower prices, it said.

Excluding suppliers' profits and running costs of just over £120, companies were making around £85 a dual-fuel customer in November. Suppliers, it suggested, tended to smooth out good and bad years and said they had not made excessive profits during the past 10 years.

Nonetheless Alistair Buchanan, the chief executive of Ofgem, fired a shot across their bows, warning them they should not use the need to invest in green energy as an excuse to raise prices. "Ofgem's role is to ensure that companies can invest, but do not use investment as a shameful excuse to overcharge consumers," he said.

"At the moment, the effect of companies smoothing prices has been neutral on consumers, but if prices stay unchanged in the New Year, then we will see customers losing out."

Energy UK, the suppliers' trade body, released a report of its own to coincide with Ofgem's. Commissioned from the NERA Economic Consulting, it stated that suppliers made only £9 a year from each electricity customer and £10 a year from gas customers. For dual fuel customers, there was no profit, because of the additional discounts usually offered to customers, NERA said.

Christine McGourty, director of Energy UK, said: "Many of us are concerned about our energy bills and would like them to be lower. But the energy itself only accounts for about half of our gas and electricity bills.

"There are a wide range of other costs, such as the cost of providing cleaner, renewable energy and the cost of bad debt, and many of these other costs are rising."

Robert Hammond, energy expert at the public-funded watchdog Consumer Focus, said: "Consumers who have seen only tiny cuts to their energy bills, while wholesale prices have plummeted, will find it laughable that the suppliers say they are making such miniscule profits. These figures are completely at odds with Ofgem's own analysis, which shows the energy firms are making huge, and increasing, profit margins."

David Hunter, an energy analyst at McKinnon & Clarke, said it was impossible to unravel the profitability of the companies, which own both generation and supply.

"Without having access to the level of detailed commercial information Ofgem says it has had from the suppliers, it is difficult to strip away the layers of complexity in these large, vertically integrated utility giants," he warned. What is clear is that overall, profits have seldom been higher for these companies, and dividends for shareholders continue to rise."