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Ofgem Profits Questioned, Reform Sought

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The Ofgem profit margin may have risen because of price increases by energy providers. (Photo: Stephen Davies)
The Ofgem profit margin may have risen because of price increases by energy providers. (Photo: Stephen Davies)


  • Ofgem's $197 profit figure raises energy suppliers' eyebrows
  • Regulator clarifies tariff structure to promote competition
  • Ofgem proposes minimum 20% of supplier power be auctioned by 2013

Energy suppliers are criticizing British energy regulator Ofgem for inconsistent profit figures, following Ofgem claims that its profit margin for energy firms increased from £15 ($23) in June to £125 ($197) in October.

The profit margin showed losses from 2004 to 2009, and as wholesale prices continue to rise, Ofgem expects margins to decline to roughly £65 ($102) by November. It also predicts a drop in profit to roughly £90 ($142) per customer for 2012.

Ofgem's profit margin figure is a snapshot of supplier profit from dual-fuel customers, assuming energy prices and bill amounts remain unchanged through next year. Ofgem claims the the profit margin increase is as a result of rate hikes by six leading British energy companies.

However, suppliers question the validity of the figure and believe it is misleading. British Gas, which only made £24 ($37) per dual-fuel consumer after taxes, says Ofgem's figure is flawed because it understates commodity costs, excludes customer discounts, and excludes the monetary benefits received from fixed price contracts. SSE Plc., the second-largest British energy supplier, agrees the numbers are not clear, telling BBC News: “The approach adopted by Ofgem in calculating this figure is entirely theoretical and does not reflect how a responsible energy supply business manages its energy procurement strategy in reality.”

The Ofgem profit margin may have risen because of price increases by energy providers that are higher than the increases in wholesale energy costs. Ofgem said in a statement that it believes radical changes are needed to tackle poor supplier behavior, a lack of transparency and excessive consumer tariffs.

Ofgem Seeks Market Overhall

In addition to Ofgem's profit figures, the regulator has released its simplification plan, which would enforce a no-frills tariff consisting of a fixed charge and unit charge. As a result, consumers will only have to compare the charge for energy used.

Complicated tariffs are still allowed but only at fixed prices and fixed terms, with the exclusion of tracker-style tariffs. The automatic extension of innovative contracts are prohibited, and extra billing layers, such as discount structures, will no longer be used.

Every firm will have a total of six standard tariffs. Suppliers can raise or lower customer charges on simple tariffs, and are required to give a thirty-day notice for any changes. Ofgem hopes the clear price comparison offered in the new plan will improve competitive conditions, lowering the price for consumers.

The bill simplification is only the first of four reform steps as Ofgem is looking for ways to reform wholesale energy markets. Wholesale energy markets are where suppliers buy their energy, and Ofgem will release plans to aid business users in November.

Ofgem will also decide by end of year on proposals to relinquish the control of the Big Six to other competitors in the wholesale electricity market. As it stands, large suppliers have a distinct advantage over their competitors because they generate their own power and sell the majority to consumers. Very little of the Big Six's energy returns to the wholesale markets.

To make the wholesale marketplace more fair, Ofgem is proposing that a minimum of 20% of a company's power be auctioned by 2013. If consultations run smoothly and the industry does not object to vital proposals, the overhaul will begin at the end of next year.

Key Statistics – Energy Prices in the UK (source: OFGEM)

  • Increasing network costs account for 20% of each consumer's energy bill; roughly £30 billion ($47 billion) in expenditure is necessary over the next ten years.
  • Over £10 billion ($15.7 billion) importation facility investments have been delivered by the British energy market.
  • Energy efficiency and environmental programs adds £100 ($157) to the average energy bill worth £1,300 ($2,051).
  • Winter gas prices for this year and 2012 will be roughly 40% higher than last year's winter season.
  • Within the next nine years, Britain must invest £200 billion ($315.6 billion) to meet its environmental and energy targets.

By Nicole Manuel for
Nicole Manuel is a freelance economics, finance and blog writer with a degree in economics and over two years of experience.

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