Energy company costs and margins

As you know I have reported on energy company margins in previous blog entries (see my Energy Professional blog). This is of interest to energy officers as we advise the public on reducing their energy bills and getting the best deal from their energy company. We know that an alarmingly high number of people in the south west – and especially in Devon and Cornwall – have never switched from their home supplier since deregulation in 1998/99. These customers have real gains to make and I generally encourage people to make the ‘first big switch’. Having done so, there is little to be gained from making further switches, due largely to the very low net margins the energy companies have to play with, which Ofgem suggests have recently risen to about £50 per year for a typical dual-fuel customer. With a margin this low it is almost understandable that there is little price variation between the big six.

Typical dual-fuel customer bill, costs and total indicative net margin for the next 12 months
Typical dual-fuel customer bill, costs and total indicative net margin for the next 12 months

One of the graphs from Ofgem’s latest report on net margins, showing the relationship between wholesale costs, other costs/VAT and the customer bill. Note the gap between costs and the customer bill is widening, providing energy companies with better margins.

dual-fuel-margins-06112012-1359
Changes in retail bills, costs and total indicative net margin for the next 12 months

The issue is, of course, not quite as simple as suggested here. For example, there are strategic issues such as the degree of vertical integration that has taken place within the industry and the charge that energy companies make between the energy production side of the business and the retail side; is it possible that wholesale prices are artificially inflated? However, such matters are for Government and regulators; as energy officers we have the net margin statistic to inform our approach to advice.

…and for those of you who like to see the numbers…

Link to Ofgem web page:

http://www.ofgem.gov.uk/markets/retmkts/rmr/smr/pages/indicators.aspx?utm_source=Ofgem+Website+Mailing+List&utm_campaign=f1c609a138-Ofgem_Email_Alert_10_31_2012&utm_medium=email

Colin Anderson

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