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Ofgem will scrap the current tool it uses to monitor the level of profits energy companies make from their supply business, after months of heavy criticism from the industry.
Ofgem’s supply market indicator (SMI) aimed to provide a 12-month forward view of cost trends using the average annual consumer bill and estimates of the annual cost per customer to the supplier, including wholesale commodity and policy costs.
The SMI was frequently used by the national press as a barometer for the actual profits being made by companies, despite the fact that the model is not based on financial results from any of the large suppliers.
As wholesale market prices fluctuate the quarterly – and previously monthly – model would show cost and profit shifts. However, the model was unable to show the specific hedging strategies of each company which play a signficant role in how wholesale price moves affect the business.
Critics of the SMI argued that by presenting misleading data about the costs faced by suppliers Ofgem was fueling mistrust in the industry.
In August last year former Energy UK chief executive Angela Knight said: “The SMIs are not reliable, are being used in a way that is misleading and must be reformed.”
Ofgem said in a statement on Friday that it will review the information it uses in order to provide “greater transparency about the market to inform the energy debate”.
“We remain committed to providing information for consumers about the trend in supplier costs and revenues going forward,” Ofgem said.
“This summer we will announce a new range of wholesale and retail market indicators which we will be publishing on a regular basis,” the regulator added.
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