December 8, 2009 2:00 am

Ofgem warns industry of 'radical reform'

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments

Energy companies face the threat of "radical reform" of the market if profit margins keep rising, the industry regulator warned yesterday, sparking an angry response from suppliers.

Alistair Buchanan, the chief executive of Ofgem, said the regulator's role was "to ensure that companies can invest, but do not use investment as a shameful excuse to overcharge consumers".

He added that if suppliers' profit margins continued to rise, "the consumer is going to start to lose out".

However, his argument was rejected by Energy UK, the industry group, which said that other costs such as bad debts were also rising.

Wholesale gas and electricity prices have plunged since the summer of 2008, but retail prices have fallen only modestly; by an average of £70 per year for a "dual fuel" customer, according to Ofgem.

The only member of the "big six" suppliers to cut prices since July has been Eon, which announced a 3.3 per cent reduction in its gas price at the beginning of that month.

As a result, profit margins have been rising. On Ofgem's calculations the "net margin" - the difference between the retail price of the gas or electricity and its costs, including both the wholesale price and other operating costs - has risen to 7 per cent, or about £85 per year, for a dual fuel customer.

The falling price of gas and electricity in the futures markets means that over the next six months the wholesale cost of energy is set to decline further, Ofgem believes, raising suppliers' margins well above their present levels.

Ofgem officials said they accepted that suppliers needed to make a profit, and that margins had been close to zero on average for the five years since the start of 2004.

However, Mr Buchanan said it would be looking at the need for further action in the new year, adding: "We will not shy away from proposing radical reform to protect the interests of consumers."

Ofgem's analysis was disputed by Energy UK, citing a study from NERA Economic Consulting that claimed to give a truer picture of profitability. It argued that on average, suppliers "are not quite breaking even" on dual fuel customers, and making just £9-£10 per year from customers buying only gas or electricity.

Eon said it had not made a profit on its retail business since 2006, although it hoped to get back into profit by the year end.

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments
SHARE THIS QUOTE