Energy prices: how are the big firms making so much money?

Jul 31, 2014

Finger pointed at the Big Six, government, Miliband and consumers – but are the figures correct?

Matt Cardy/Getty Images

Gas and electricity firms are expected to double their profit margins, according to the industry regulator Ofgem. It has estimated that energy companies will make an average £106 from each customer over the next 12 months, which is up from £53 last year and up from £9 five years ago. The Big Six – British Gas, EDF, E.ON, SSE, Npower and Scottish Power – are under pressure to cut prices after millions of households struggled to heat their homes last winter. So why are their profit margins so big? 

Failure to pass on savings to customers

The estimated hike in profits comes as wholesale prices, paid by the big firms for electricity and gas, have fallen to a near four-year low. "Given the rise in margins and that wholesale costs haven't exploded over the past four months as some expected, we would expect some companies to be offering lower prices," Dermot Nolan, chief executive of Ofgem, told the Financial Times. "But when we look at margins, we see them broadening even though there is scope for greater competition, leading to price cuts."

Fear of Miliband's bill freeze

Some energy executives have blamed their reluctance to cut prices on Ed Miliband's pledge to freeze bills for 20 months if he wins the next general election. Peter Lilley, a Tory MP who sits on the Energy Select Committee, told the Daily Mail that Miliband's plan has "backfired". With the shadow of a possible Labour government, bills are likely to be artificially inflated all through next winter, says the Mail. Some firms are also said to be spending money on stockpiling gas and power now to protect them against the possible impact of a price freeze.

Government failing to confront energy firms

In turn, Labour blames the Government for failing to stop energy companies from ripping off customers. John Robertson, a Labour MP who also sits on the energy select committee, described energy firms as "a law unto themselves" and said they were hiding behind the general election. "This is something that Ofgem and the Government should be looking at, but they seem to be absolutely inept," he told The Times. "The rest of us are paying through the nose for it and a lot of people can't afford to."

Consumers failing to switch

Trevor Sikorski, from consultants Energy Aspects, told BBC Radio 4's Today programme that consumers are as responsible for the state of the market as the energy firms themselves. Consumers "generally don't switch very much", he said, and "we're not sensitive to price changes when they happen, which isn't encouraging competition".

Ofgem figures 'inaccurate'

Angela Knight, chief executive of Energy UK, the industry trade body, has described Ofgem's £106 profit margin prediction as "inaccurate" and "misleading". She told the Daily Telegraph that Ofgem has drastically revised previous estimates, raising "big questions" about those published this week. For example, in January last year, the regulator initially predicted that firms would make a £120 annual profit, but then revised down the forecast to £28 after changing its methodology. Companies made a £53 profit margin that year, half Ofgem's original estimate. The regulator has admitted that it has significantly changed the way it compiles the numbers, but stands by its latest figures. 

For further concise, balanced comment and analysis on the week's news, try The Week magazine. Subscribe today and get 6 issues completely free.