UK: Big six energy firms under pressure to cut tariffs as wholesale energy prices tumble

Energy companies are under pressure over tariffs.

Energy companies are under pressure over tariffs. - Credit:

Britain’s Big Six gas and electricity firms faced fresh pressure to cut tariffs today as regulator Ofgem said tumbling wholesale energy prices meant they could afford to lower household energy bills.

Latest figures from the regulator suggest the firms are on course to make £102 profit per household over the coming year compared with £48 in 2013, assuming normal weather and no change in tariffs.

The regulator wrote to the big companies - British Gas, SSE, Scottish Power, E.ON, EDF and npower - in the summer asking to explain how they were going to pass on falling wholesale costs to their customers.

But Ofgem noted that none of the companies had taken action to win customers from their rivals by using the opportunity to reduce tariffs.

Rachel Fletcher, senior partner for the regulator’s markets division, said the figures from its controversial supply market indicator (SMI) “might be suggesting that there is room for price cuts or that you wouldn’t be expecting prices to go up”.

She added: “As regulator, it is not for us to tell companies how to set their prices. We are relying on the market to do that.

“But the thing that has concerned us is that in a situation where we have got wholesale costs coming down, you would be expecting some of the companies at the very least to be saying ‘here is an opportunity to gain market share by reducing our prices’.

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“We haven’t seen that. That raises questions for us about the extent to which there really is competition between the large energy companies.”

The remarks come with a full-scale competition probe into the energy market under way, which could ultimately see some of the larger suppliers broken up.

Ms Fletcher said Ofgem’s decision to refer the sector to the Competition and Markets Authority (CMA) was the “biggest lever” it had.

“We have pulled it out of the box and used it. That is the strongest thing any regulator can do when it’s concerned about the market. Quite frankly we are concerned that the market isn’t working in consumers’ interests.”

Ms Fletcher acknowledged that suppliers faced uncertainty over wholesale costs as a harsh winter and the Ukraine crisis could push up prices but suggested these would be limited with firms buying much of their energy up to two years in advance.

Ofgem is encouraging more energy customers to consider switching suppliers, saying that those who have been with the same company for two years are likely to save £200 a year.

The regulator’s SMI figure - for profit margins likely to be made by a typical energy supplier over the coming 12 months, all things being equal - has been criticised as unrealistic by the industry.

Ofgem insists SMI is not a forecast. Its methodology would have suggested £59 profit per household for 2013 whereas the actual figure was £48, a fall on the previous year.

But it pointed to a low reading of £15 profit margin per customer in the middle of last year which suggested that suppliers would need to raise their prices - which they did that autumn.

The regulator today also published details of how much the Big Six suppliers had profited over 2013.

Earnings from household supply were £1.13 billion, lower than £1.19 billion the year before but still substantially above the figure of £681 million in 2011 and several times more than the £221 million earned in 2009.

Profit margins in 2013 were 3.9%, with companies making £48 out of an average bill of £1,225 compared to £53 out of an average of £1,174 in 2012, or 4.5%. But margins varied between suppliers.

British Gas earned the highest revenues among the Big Six, with 42% of the gas domestic supply market and 89% of the profits. Its profit margin was 8.9%, twice that of the second largest for gas, SSE.

In electricity supply, British Gas also took the largest revenues but earned the lowest profit margin after EDF, which made a loss.

Ofgem today also announced new plans to make information published by energy companies on revenues, costs and profits more transparent.

The rules, expected to come into force next year, would include a requirement for the companies to have their annual statements on these figures independently audited.

Ms Fletcher said: “With energy prices rising and many struggling to pay their energy bills, there is understandably significant public interest in the profits of the large energy companies, and particularly the profits of their retail businesses.

“Our proposed reforms are providing increased transparency on company profits. This is important to inform public debate, encourage competition and to help suppliers rebuild customer trust.”

Energy bills have been at the centre of the political agenda since Ed Miliband last year pledged that Labour would freeze bills if elected to power.

Twelve months ago major suppliers were beginning to announce a series of price hikes though some were later scaled back following changes to Government environmental and social levies.

A number of energy suppliers have indicated they are unlikely to raise tariffs this year and SSE has said it would freeze them until at least January 2016.