Ofgem has announced its third sweeping review of the retail energy market in the past six years after finding that companies had increased their standard profit margin from dual-fuel customers by 38 per cent.
Following recent price rises announced by three of the UK’s six leading energy suppliers, the regulator said they would earn an annual net margin of £90 per customer from next month, compared with £65 in September.
However, industry figures privately questioned this calculation, pointing to the volatility of wholesale energy prices. Margins in the first half of this year were generally strong, those in the latter half considerably weaker – and those for 2011 are unpredictable.
Ofgem’s own future is under review by the government, leading some to question its motives for another inquiry. But Alistair Buchanan, chief executive of the regulator, said: “The energy retail market can only be fully effective if consumers have confidence that the market is transparent.”
Ofgem would “go beyond” its standard quarterly report on prices and conduct a “comprehensive review of the retail market and our recent reforms from the consumers’ perspective. We will also carry out a detailed investigation of the newly available retail accounts and the facts behind these numbers.”
As well as looking at the market, the inquiry will assess companies’ progress towards implementing reforms introduced by Ofgem’s last review in 2008. The new figures on profit margins served as the “warning light” for starting this exercise, and the inquiry would conclude by March, according to a person within Ofgem.
However, the announcement was met by scepticism from the industry and consumer groups.
“This is the 18th inquiry conducted by Ofgem, select committees and others into the UK energy market over the last 10 years and all previous investigations have shown competition is working,” said Sam Laidlaw, chief executive of Centrica, which owns British Gas. “We welcome regulatory scrutiny around transparency in the industry, as in British Gas we pride ourselves on being the most transparent of the suppliers.”
Mr Laidlaw added: “The UK has the most competitive energy market in Europe which has brought significant benefits to customers in terms of prices and innovation.”
Earlier this month, Centrica said its operating profit for 2010 was likely to exceed the City’s forecast of £2.2bn. The previous week, British Gas had angered consumer groups by raising gas and electricity prices by 7 per cent from December 10.
Alone among the “big six” energy suppliers, EDF has said it will freeze bills over the winter. Scottish Power, meanwhile, has announced a rise of 8.9 per cent for electricity and 2 per cent for gas, while Scottish and Southern Energy will raise prices by 9.4 per cent.
However, the central problem was not the decisions of individual companies, but the opaque workings of the retail energy market as a whole, said Audrey Gallacher, from Consumer Focus.
The UK must invest £200bn in new energy infrastructure over the next decade if targets for reducing carbon emission are to be met and old generating capacity replaced. This would inevitably be passed on to consumers, said Ms Gallacher, but companies should be more transparent by disclosing the actual wholesale costs they pay.
“We want to see firm results come out of this review. The problem is more than just the mark-up on energy prices suppliers are making. The main issue is the structure of the market and why it is failing to work in the interests of consumers.”
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