January 2015 SMI from Ofgem

Supply Market Indicators

In our regular monthly review of Ofgem’s Supply Market Indicators we focus on January 2015’s release from the energy regulator.

Quite why is unclear, but Ofgem didn’t bother to publish their Supply Market Indicator in December 2014.

That it was produced is known but it certainly is a little curious that something the regulator places so much stall in was not published in its regular monthly slot and not used as a 2014 round-up.

Given the controversy Ofgem have caused with their ‘re-calculation’ / ‘refreshed methodology’ and ‘revisions’ to their previous predictions conspiracy theorists, if the subject was actually interesting enough, would be puzzling over why Ofgem chose to not publish last month.

Did the results not provide the message Ofgem wanted? Was another fundamental error in the assumptions found? Was the Ofgem Christmas Party hangover too great? Or did they simply forget to do it?

Regardless, December’s SMI-less was welcome news for Energy UK, the trade body who represent the energy suppliers. Energy UK Chief Executive and friend of Business Juice, Lawrence Slade pulled no punches when he claimed:

“It’s high time the SMI was abandoned”

Over estimation

That followed the publishing of the outcome of research undertaken by economic consultancy Nera that confirmed the suspicion that Ofgem’s SMI had relied on inaccurate and misleading estimates to deliver their ‘indicator’ of energy company profits.

The research revealed that the level of inaccuracy was in some cases as high as 200% with Nera claiming that the fundamental flaws being committed by Ofgem included over-estimating energy consumption whilst underestimating costs.

Slade explained:

“The [Nera] report shows that the SMI takes no account of what energy companies have to pay out in financing costs, interest or tax but gives the misleading impression that there are massive profits to be made.

“Ofgem’s [Chief Executive] Dermot Nolan admitted the SMI was no predictor of future profits but Ofgem still risks misleading customers by publishing these inaccurate figures every month.”

Except in December that is.

Was there a connection between Nera’s findings and Ofgem’s reluctance to publish?

Who knows, but January has seen an SMI published. The results of which are below, additionally we provide the results of the unpublished December 2014 SMI as a comparison.

January 2015 SMI

Headlines:

• Wholesale energy costs DOWN (£574)
• Network costs DOWN (£297)
• Environmental and Social costs UP (£93)
• Supplier costs UP (£176)
• Supplier profit UP (£114)
• VAT DOWN (£62)

In detail the January 2015 SMI from Ofgem reported that:

(November, the last month for which Ofgem officially reported figures are in brackets)

Retail Price

• They estimate that the average annual dual fuel bill has fallen significantly for the next 12 months to £1,305 (£1,325)
• They believe gas bills will fall to £715 (£739) per annum on average whilst electricity bills will be slightly higher at £609 (£608)

Wholesale Prices

• That wholesale prices for NEXT Winter have fallen since the start of 2014 with the gas price 30% lower and the electricity price 18% lower
• That wholesale prices will make up just 44% (44%) at £574 (£588) of the average dual fuel bill
• The equivalent figure 12 months ago for the contribution of wholesale prices to average dual fuel bill was £633 over 51% illustrating the decreasing influence the cost of energy is having on the bills we pay

Network Costs

• In contrast, Ofgem have revealed that network costs fall to £297 (£305) of the average bill over the next 12 months equivalent to 23% of total cost

Environmental & Social Obligation Costs

• That environmental and social obligation costs have again increased this time to £93 (£91) or 7% to the average customer bill

Supplier Operating Costs

• That supplier operating costs will be marginally higher at a forecast level of £176 (£175) or 13% of the average dual fuel bill

Supplier Pre Tax Margins

• That Supplier pre-tax margins (profit) will be higher at £114 (£105) or 9% of an annual duel fuel bill over the coming 12 months.

December 2014 SMI

Headlines:

• Wholesale energy costs DOWN (£585)
• Network costs UP (£306)
• Environmental and Social costs UP (£92)
• Supplier costs LEVEL (£176)
• Supplier profit UP (£109)
• VAT LEVEL (£63)

Ofgem’s SMI 2009-2015

Ofgem’s SMI has been reporting since 2009 and the comparative annual results are detailed in the table below.

Unfortunately, prior to 2013 Ofgem failed to separate Network costs and Environmental & social obligation costs despite these being two of the largest and fastest growing areas of expense. However it is possible to see that the increase in the growth of the catch all segment Other direct costs, that is those that are not under the control of the supplier, from £318 in 2009 to £397 today, an increase of 25%.

In contrast, wholesale energy costs have actually fallen over the period however as one would expect this hasn’t been a linear progression and instead has been subject to peaks and troughs.

Supplier operating costs jumped between 2009 and 2010 and maintained their levels through subsequent years only to be subject to a recent jump again in 2014 to £168.

The biggest variance however is reserved for Ofgem’s assumption of supplier profit which according to their calculations has grown from £48 in 2013 to £105 today and up from just £10 in 2009. Suppliers contest this but it is easy to see why Ofgem maintain that it is suppliers keeping costs high for consumers.