UK Big Six Margins Grow: Ofgem
Between 2009 and 2015, the average combined gas and electricity pre-tax domestic supply margin across the six large UK retailers grew from around 1% to around 4%, despite high levels of switching, implying more customers on better offers. There were significant differences between the suppliers’ margins, according to analysis published August 31 by the regulator Ofgem.
Between 2015 and 2016, profits earned by the six large suppliers continued to vary substantially and showed an increase in the average combined gas and electricity pre-tax domestic supply margin from 4.1% to 4.5%. E.ON reported an increase in its domestic margins from 4.5% to 7.0%. SSE also showed a slight year-on-year increase from 6.2% to 6.9%. Similarly, npower reported higher domestic margins year-on-year, despite making the biggest loss (-6.3%). Centrica earned the highest domestic margins amongst the group (7.2%) despite reporting a slight decrease year-on-year. EDF and ScottishPower also showed a similar decreasing trend.
The supplier cost index (dual fuel) was broadly flat between 1 May and 1 August 2017. This followed the 6% drop in the previous quarter. There was an increase in expected electricity costs offset by a reduction for gas, resulting in an increase of 0.9% for dual fuel, it said.
The difference between the average price of the standard variable tariff (SVT) offered by the six large suppliers and the cheapest tariff in the market reached a two-year low of around £230 in February 2017, but has shown an increasing trend since then and reached £300 in July, mainly as a result of the increase in the price of SVTs. High SVTs subsidise the tempting price offers to lure new customers, and so if they go, switching could suffer.
Between October 2016 and April 2017 the average proportion of customer accounts on SVT continued to fall, from 61% to 59%, for non-prepayment domestic customers.
Between 2015 and 2016, profits earned by the six large suppliers continued to vary substantially and showed an increase in the average combined gas and electricity pre-tax domestic supply margin from 4.1% to 4.5%.
Based on the information reported by the large suppliers the average domestic dual fuel bill fell by 4% between 2015 and 2016 as a result of reductions to suppliers’ prices, which more than offset an increase in average consumption as a result of colder weather.
Electricity switching fell slightly between May and June 2017 to 380,000, which was the highest level in the month of June since 2011. Gas switching was also high, at 310,000, the highest level of gas switching in the month of June since 2009.
Following an increase at the end of 2016, wholesale energy prices fell and were less volatile in Q1 2017.
Coal’s share of the electricity generation mix in Q1 2017 remains low by historical standards. Gas’ share remained stable at 40%, while renewables contributed around 27% of the mix.
New entrants to challenge the Big Six
Thanks to crowd-funding, a new company, People's Energy, has been set up to challenge the dominant retailers, which will put profits and ownership in the hands of UK consumers of gas and electricity. "Unlike the existing ‘Big Six’ Energy providers, we want to be transparent, give you ownership and give back the profits to you, and we want to offer you green energy," the company says.
It told the Guardian newspaper September 1 that it will source its energy from the same wholesale market as the established suppliers but customers will automatically get shares in the company, as well as a portion of its earnings: the couple promises to redistribute 75% of profits as an annual rebate.
They will also give customers representation on the board of directors and publish key data such as salaries and wholesale energy costs, says co-founder David Pike, a former consultant in the power sector. The standard variable rate will be around £129 cheaper than the big six average, he said.
“We were fed up with our own energy supplier and it prompted us to think there really must be a better, fairer and simpler way of supplying energy to people that’s based on trust, not distrust,” says Pike. “The cynical business model which most suppliers operate on – get them in cheap, hope they’ll forget, and then make lots of money on the variable tariff – just seems inherently unfair and unjust.”
Another company entering the UK retail sector to exploit the perceived ill-will towards the incumbent companies is French energy giant Engie. It said in May it was not only the first UK supplier to commit to rolling customers onto the cheapest available tariff at the end of their fixed term plan; but would launch Tracker, "an innovative product designed to align retail and wholesale prices like never before, reflecting the wholesale price changes in the price that customers pay. It will align customer bills with the real price of energy, bringing a new level of price fairness and transparency to UK customers."
According to Ofgem, in Q1 2017 the proportion of satisfied and very satisfied customers stood at 69% for both gas and electricity, based on the responses to a new online consumer survey.
William Powell