Energy retailers could make £1.7bn profit over next year

Energy retailers could make £1.74 billion of profit over the next 12 months thanks to high wholesale costs and allowances in the price cap, industry experts have predicted.

A new report by Future Energy Associates (FEA), commissioned by the End Fuel Poverty Coalition, analyses costs associated with energy retail including standing charges and wholesale costs.

Under the current price cap suppliers have Earnings Before Interest and Taxes (EBIT) and Headroom Allowance Percentage (HAP) allowances for profit margin. These are set as a fixed percentage of wholesale costs of 1.9% for EBIT and 1.5% for HAP.

This, the report said, has resulted in a notable increase in supplier profits over the last year.

It said: “In Q1 2023, this was up to £130 annually for the average household electric bill, versus £27 in Q2 2017. These profits have now started to decline and were at £60 at the start of Q3 2023.

“With energy bills predicted to remain at similar levels and 29 million households currently on the standard variable tariff, the combined profit energy firms could make in the next 12 months is £1.74 billion.”

The report stresses the figure is an estimate and that it does not take into account price cap adjustments reflecting Covid and higher wholesale costs as a result of the war in Ukraine. As such, it adds, suppliers may make even more money.

Ofgem has consulted on amending the rates of return for suppliers. Under these proposals, the EBIT allowance would rise by approximately £10 for the next cap in October, taking it to c£47, equating to 2.4% of the full price cap level in that period.

Elsewhere the report highlights regional inequalities in terms of costs for consumers, with differences in the way power is distributed across the country, leading to differences in the prices consumers pay.

Furthermore, the makeup of the network means that regional electrical losses vary which means that more power has to be bought by the supplier for the same amount of energy end-use.

It found the most expensive region for electricity was Manweb; the area covering Merseyside, North Wales and parts of Cheshire. This was £84 a year more expensive than the cheapest region in the East Midlands.

“This was largely driven by higher standing charges, with Manweb being highest at 65.8 p/day,” the report explained, adding, “in comparison, London had the cheapest average electrical standing charges, at 41.9 p/day. Seeboard (South East) had the highest unit rate at 33.2 p/kWh and Yorkshire had the lowest at 31.1 p/kWh.”

The report found that at £1,005/year, the East Midlands had the cheapest gas costs with the standing charge at 33.8p/day and unit rate at 7.34p/day. Swalec (South Wales) is the most expensive at £1,048/year (standing charge at 32.9p/day, unit rate at 7.73p/kWh).

Meanwhile the report makes recommendations to consumers who wish to fix their tariffs, with FEA’s forecasts suggesting that anything below £1,946 annually and which has an exit fee of less than £80 is worth fixing to.

“The current best variable deal would be with two different suppliers: Home Energy for gas and Fuse Energy for electricity. This may indicate a shift in the market towards single fuel deals and those households not hyper- aware of the energy market may be left behind,” it warned.

Commenting on the report’s findings Simon Francis, coordinator of the End Fuel Poverty Coalition, said: “This report shines a light on the murky depths of Britain’s broken energy system. Without fundamental overhaul of the energy grid and energy tariffs, households will continue to lose out while suppliers will profit.

“Energy supplier profits predicted for the next 12 months could easily cover the cost of a ‘help to repay’ energy debt scheme and leave a quarter of a billion pounds left over.”

Dylan Johnson from Future Energy Associates added: “Our report reveals that the retail energy market is experiencing swift changes: falling wholesale prices are influencing retail costs, more fixed tariffs are available, and new suppliers are entering with innovative tariffs.

“Yet, questions persist over the speed of these changes, supplier profiteering, and regulator’s role in promoting competitiveness. The emergence of competitive single-fuel deals, while exciting, may pose risks to households less vigilant of tariff prices.”

An Energy UK spokesperson said: “As Ofgem recently stated, suppliers have lost £4 billion over the last four years – something which this analysis appears to have overlooked. So it’s clear that the theoretical margin allowed in the price cap does not equate to profits made in reality – showing the flaws in basing future projections on that.

“Ofgem has also stated that while it expects many suppliers to return to making profits this year this must be seen in the context of these recent losses. It’s also worth stressing that the vast majority of customers are on price-capped tariffs, which Ofgem sets to ensure that customers pay a fair price reflecting the costs of supplying energy – and this is unlikely to change significantly over the next few months.

“If we are to have a sustainable retail market where companies can invest in and improve their services – and avoid a repeat of the multiple supplier failures that loaded costs onto customer bills and caused huge disruption – then it is important that suppliers return to making a profit.”