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Ofgem’s War on Profit and the Causes of Profit

ofgem logoOfgem have announced their latest attempt to force energy suppliers to provide transparent information around their profits amid on-going scepticism from the regulator that figures provided represent a full picture.

Despite Dermot Nolan, Chief Executive of Ofgem’s claim to want principle and not prescriptive based regulation, his organisation has moved to further entrench the exact opposite through direct prescription of how energy companies should be presenting their accounts.

This is uncomfortable territory and not just for the energy suppliers affected.

Ofgem claims their new rules will “make information on energy company revenues, costs and profits more robust, useful and accessible”

Ofgem announced that the rules, due to come into force in 2015, will include a requirement for the energy suppliers to:

  • have their annual segmental statements independently audited,
  • publish their statements no later than four months after their financial year end.
  • Mandated reporting against Ofgem’s SMI (Supply Market Indicator) categories
    • wholesale costs;
    • network costs;
    • environmental and social obligations costs;
    • and supplier operating costs.

Welcoming the new initiative Rachel Fletcher, Senior Partner for Ofgem’s Markets Division, 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.”

The announcement coincided with Ofgem’s review of the 2013 energy supplier statements, which revealed:

  • Total profits across the Big 6 in their generation and supply businesses fell from £3.5bn in 2012 to £2.8bn in 2013.
  • Overall, 2013 profits were at their lowest level since the Big 6 started producing the statements in 2009.
  • The fall is largely due to lower profits in generation.
  • Disparity remained between the performances of individual suppliers with British Gas, securing profit margins from its gas supply business of just under 9%, double that of SSE in second place.
  • Divergent approaches also followed in suppliers’ response to information requests with E.ON, nPower and EDF failing to provide full disclosure.

Domestic energy

  • Operating profits in supply of energy to domestic customers have increased in aggregate since 2009
  • Profits in the domestic supply market have fallen slightly between 2012 and 2013, providing an average pre-tax profit margin of 3.9 per cent.
  • In 2012 the average dual fuel household bill was £1,174, of which £53 was operating profit, compared with £48 out of an average bill of £1,225 in 2013
  • In 2009, three of the six large energy suppliers made losses in this segment of the market.
  • In 2013, only EDF continued to make a loss in domestic supply.
  • The very large disparities that were apparent between the six large suppliers in 2009 have diminished over time.

Non-Domestic energy

  • Profits in the non-domestic segment have fallen from £569m in 2009 to £423m in 2013
  • In 2009 non-domestic energy contributed 72% of total profit compared to 27% in 2013.
EBIT (£ million) 2013 2012 2011 2010 2009
Generation and supply 2797 3551 3656 3633 3102
Generation 1240 1951 2408 2010 2311
Supply 1557 1600 1249 1623 790
Domestic supply 1133 1190 681 769 221
Non-domestic supply 423 410 568 854 569