Energy companies' profit up 733% per person

Ofgem says the profit margin for energy firms has risen to £125 per customer per year, from £15 in June. Time for competition to turn up the heat...

by Dave Waller
Last Updated: 14 Oct 2011
This figure measures the amount suppliers would make if energy prices and bills remained unchanged for the next year. The good news is that Ofgem predicts these margins will fall to about £90 a customer next year. But with what’s bound to be a tough winter coming first, the focus will be less on what’s happening next year and more on the not inconsiderable discrepancy between the suppliers’ pockets and those of their average customer. Indeed, when people are warning of another Great Depression, it’s hardly the time to be facing your highest-ever gas and electric bills.

To be fair to the Big Six energy suppliers, there’s nothing illegal about making a profit, and in a world where wholesale prices are going up, it’s no surprise that the prices do too. The current problem comes down to competition – or lack of it. The fact remains that if there was more competition, then firms which were pricing incorrectly would lose out. Ofgem has stepped up to the hot-plate and insisted it will do its bit here, pledging to force suppliers to simplify tariffs to make it easier for customers to compare prices. Well, at least it’s a start.

As part of Ofgem’s simplification plan, suppliers will be forced to have no-frills tariffs, which would consist of a standing charge - fixed by the regulator - plus a unit charge for energy used. Extra complexity such as discount structures will be removed altogether. That way customers won’t have to navigate their way through a maze of incomprehensible options – currently there are 400 different tariffs to choose from, which is apparently bamboozling energy staff as much as the poor punters.

Ofgem says the average dual-fuel bill, under what the regulator describes as the ‘stranglehold of the Big Six’, is now £1,345 a year. ‘When consumers face energy bills at around £1,345 they must have complete confidence that this price is set by companies competing in a fully competitive market,’ said Ofgem's chief exec Alistair Buchanan. ‘At the moment that is not the case.’

Indeed, beyond the Big Six, competition remains very niche – largely provided by companies like Ecotricity and Ebico, who are going after the green angle. But MT this month caught up with newcomer Ovo, which in only two years has hit turnover of £60m and is drawing 1,000 to 2,000 new customers every week – even reducing gas prices as others put theirs up by 14.5%. 

It may seem counter-intuitive to take on the energy establishment but, as Ovo says, the big guns’ prices are borne of the inefficiencies of scale. Such competition can only be healthy – and not only for the energy customer. Given that everyone needs the product and almost universally despise the current suppliers, if a more nimble competitor can step in and make itself more appealing – which shouldn’t be too hard – the whole landscape could in theory become a lot less cold…

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Finance Energy

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