Ofgem replaces controversial SMI

Ofgem has revealed its new Supplier Cost Index, a replacement for the controversial Supply Market Indicator which it withdrew in 2015.

The energy regulator has introduced the new Supplier Cost Index (SCI) in an effort to “provide transparency around energy prices trends” and help customers “understand what is driving their energy bills,” Ofgem’s chief executive Dermot Nolan told press today.

The new indicator gives a 12 months ahead view of the cost of energy based on a combination of wholesale costs, network charges and government environmental and social programmes. These costs make up around 85 per cent of consumer energy bills.

Data from the first indicator shows that the expected cost of supplying the typical domestic customer on a dual fuel contract is around 15 per cent higher than the annual forecast cost in January 2016. However, it is also around 10 per cent lower than the cost of energy three years ago.

Nolan said that Ofgem does not currently see a pressing need for price increases on the back of rising wholesale costs which he described as “far from unprecedented”.

He urged larger suppliers in particular to offset increased costs via efficiency measures rather than passing costs on to consumers.

The SCI does not include energy company operational costs or the costs of the smart meter rollout. In addition, unnlike its predecessor the Supply Market Indicator (SMI), the SCI will not put forward predictions on supplier profitability. 

The SMI was widely criticised by industry for giving a misleading picture of the state of competitiveness in the energy market, and was withdrawn by Ofgem in 2015 in the midst of the Competion and Markets Authority (CMA) energy market investigation. However, Nolan stressed today that the introduction of the SCI does not show Ofgem has “caved” to supplier pressure around the metric.

The regulator has also pointed out that profitability information on suppliers will still be available via its annual Consolidated Segmental Statements and via the annual market summary it was recently asked to produce by the CMA. The first of these will be published in the second half of 2017.