Energy retailers are making higher profit margins because the industry’s regulator has shifted some of the risks and costs of running their business to household bills, UK consumer group Citizens Advice has said.
Ofgem, the energy regulator, introduced a series of measures this August that boosted profit margins allowed under the government’s energy price cap — which was instituted in 2019 and put a limit on how much power companies can charge per unit of energy.
Allowed profit margins under the price cap have almost tripled from around £24 per customer on an average dual fuel bill in October last year to £63 during the same month this year, according to Citizens Advice.
“Supplier profit margins are higher than they should be,” said Andy Manning from Citizens Advice. “We are concerned that consumers already faced with a cost of living crisis are being forced to prop up energy suppliers.”
The measures contributed to the 80 per cent increase in the price cap to £3,549 a year for an average household from October 1. Households have subsequently been protected by a government bailout — the energy price guarantee — which will limit costs for the typical home to £2,500 until April next year.
However, the guarantee also protects suppliers because they receive a guaranteed payment above that level, which is included in the wholesale price of power, said Citizens Advice.
Ofgem made the changes to stop more energy companies from failing after 29 of them collapsed last year. The cost of transferring the customers of failed suppliers to rivals is being spread across all household energy bills. The National Audit Office in June said that every household is already paying an additional £94 a year on their energy bill to cover the costs of collapsed energy companies.
But Citizens Advice said the protections introduced for suppliers in August were already adding to customer costs and that the regulator had either “transferred risk from suppliers to customers or provided separate remuneration” to companies, which is paid for by households.
Analysts at Investec have forecast that the energy price cap will rise to £4,211 from January — though the government price guarantee will still be in place.
Martin Young, analyst at Investec, said that “supplying energy had turned out to be a riskier business than expected and the industry needs well-capitalised suppliers who can bring forward innovation to assist the drive to net zero”.
Ofgem has flagged concerns that allowed profit margins under the price cap are too large and launched a stakeholder consultation on the question in August. “The current approach could provide unduly high returns to energy suppliers,” the regulator said.
“We are currently considering all representations. We intend to publish a statutory consultation soon.”
Measures introduced in August that have protected suppliers include a decision to allow companies to recoup the cost of “backwardation” from October — shielding suppliers from significant mismatches in the price of near-term power and gas and prices in the futures markets.
There is also a “market stabilisation” mechanism, which compensates companies — at consumer expense — if customers switch suppliers before using the energy that had been bought for them at high wholesale prices.
A cap on the price suppliers pay for the electricity system operator to balance the system has also been introduced with consumers paying the difference.