Big six profits fall on lower generation margins

The big six energy companies’ total UK profits fell by £133 million or 3.4 per cent last year, according to Ofgem’s latest annual review.

A drop in the profitability of generation businesses outweighed higher supply margins, the regulator found, to cut profits from £3.9 billion in 2011 to £3.7 billion in 2012.

The average margin in generation for 2012 was 20 per cent, down from 24 per cent in 2011. Profits on the supply side rose over the same period from £1.25 billion to £1.6 billion, however, with household retail margins increasing from 2.8 per cent to 4.3 per cent. The industry has consistently argued that 5 per cent is a reasonable margin for supply businesses.

Higher wholesale costs were the main factor behind a rise in the average household bill from £1,006 to £1,174 over the period, adding £75, according to Ofgem’s assessment.

Other costs, the tranche commonly labelled “green levies”, which includes energy efficiency and renewable obligations, stacked up to £60. Suppliers’ costs added £8 and higher profit margins £23.

The report said: “There is no right or wrong profit margin for a business to earn in a competitive market. If the market is working well, the margin will reflect a company’s ability to attract and retain customers though offering competitive prices and good products and service levels, and its ability to reduce its costs.”

It highlighted Ofgem’s retail market reforms and measures to boost wholesale market liquidity, which the regulator says will make the market “simpler, clearer and fairer”.

Audrey Gallacher, director of energy at Consumer Futures complained the data in the report was old and “offered a snapshot of the past, not the present”.

Fuel poverty levels are “extremely high” and more needs to be done to help consumers, she added. “The increase in supplier profits contrasts with declining affordability. The sector is riding out tough economic times better than its customers are, so there’s a pressing need to help the latter.”