30th Jan 2015 14:48
LONDON (Alliance News) - UK gas and electricity regulator Ofgem Thursday said large energy providers are set to experience a small increase in profits during 2015, because future wholesale gas prices have fallen by more than the cuts made by the companies to household bills.
The regulator made the claim in its latest supply market indicator report which looks at cost trends in the domestic energy market over the next 12 months.
However, Energy UK, the trade association of the energy market which includes the Big Six energy firms, has called the claims made by Ofgem "wildly exaggerated," and said Ofgem estimates have been "consistently out over the last four years by as much as 200%."
Large suppliers, referring to the "Big Six" energy firms, are set to benefit from an improved pre-tax margin in 2015 of around GBP114 per year per household bill, which is GBP9 higher than in November 2014 thanks to "significant declines" in future wholesale costs, said Ofgem.
The Big Six energy firms are EDF Energy, Scottish Power Ltd, British Gas, SSE PLC, E.ON and nPower.
Ofgem has predicted companies will pay around GBP13 less per year, per household bill for their wholesale gas and electricity costs compared with the regulator's predictions in November. That represents around 44% of an average dual fuel energy bill.
Network costs are also expected to fall by around GBP8 per year, per household bill for large energy firms, representing around 23% of a customer's annual dual fuel bill and that is a result price control measures Ofgem introduced for electricity distributors in 2014.
Supplier operating costs will remain broadly flat over the next 12 months, but a company's costs relating to environmental and social obligations is set to rise by GBP2 per year, per household bill compared to the regulator's estimate in November.
Ofgem said the average dual fuel bill over the next 12 months will be around GBP1,305, down from the estimate of GBP1,326 in November. This has taken into account seasonal demand and the price cuts that are set to be introduced in February and March by the Big Six energy firms.
The regulator did note that the pretax profit large firms will make in 2015 will depend on a variety of factors such as hedging, cost efficiencies and actual consumption levels - and this is where Energy UK comes in.
The trade association claims Ofgem has overstated company profits for gas, electricity and dual fuel for the last four years, and said "Ofgem has given the impression that profits per customer were between 50% to 200% higher than the actual figures."
The overstatement is due to Ofgem not taking into account 5 million customers on Economy 7 meters, and because it uses very general calculations that do not take into account many costs and issues that energy companies face, including Ofgem using hedging strategies based on information from 2008 and overstating average consumption levels which have a direct impact on company's revenue.
Energy UK also flagged issues such as Ofgem assuming that indirect costs rise with inflation, and said that fixed costs per customer may rise as large supplier's market share falls as independent suppliers capture more of the market, partially due to Ofgem's announcement last week supporting smaller firms and shunning the Big Six, despite them introducing price cuts.
Scottish Power Ltd, part of the Iberdola Group, is reducing domestic gas prices by 4.8% from February 20 and has launched a new fixed-price tariff that has an average dual fuel bill of GBP930.
British Gas, part of Centrica PLC, announced it would cut its customers' average energy bills by 5% from February 27, while E.ON is to slash its standard gas price by 3.5% of annual gas bills. nPower also said it would be reducing customer bills by an average of GBP33 per year across both gas and electricity for those who saw an increase in their bill during December 2014.
SSE PLC said it will cut household gas prices in Britain by 4.1% on April 30, a lot later than the other firms whilst EDF Energy was the last to introduce a price cut, announcing it would only be reducing prices by 1.3% as it made previous cuts in 2014, including a 3.8% reduction in December alone.
Last Friday, Ofgem urged customers to switch to a fixed price energy tariff, despite the major firms committing to cuts to their variable tariffs in February and April, and said independent suppliers, rather than the Big Six suppliers, are offering the cheapest deals.
The support for independent suppliers came after Ofgem released research that suggested some of the cheapest fixed tariffs were with independent suppliers, with fixed deals averaging around GBP915 per year, less than Scottish Power's new fixed tariff.
SSE shares were up 0.6% to 1,613.77 pence per share on Friday afternoon whilst Centrica shares were up 2.2% to 299.15 pence per share.
By Joshua Warner; [email protected]; @JoshAlliance
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