UK energy suppliers: Higher margins will keep the heat going even as bills go down

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Energy bills for British households are falling. But the flames of outrage over energy company profits still burn.

Ofgem energy regulator announced this week new ceilings on electricity and gas unit prices that suppliers can apply from July. A typical annual household bill will drop to £2,074. It had previously been £2,500, including government subsidies.

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Households, however, will still pay an average of 60% more than before the Russian invasion of Ukraine exacerbated sharp increases in wholesale prices.

Unions and activists responded with an attack on Ofgem for not reaching out to energy companies “profiteering”.

The difficulty is that not all energy companies are created equal. Even some large companies lose out on the domestic market power sales. Of the big three companies continuing to take earnings away from domestic supplies – British Gas, EDF and ScottishPower – only the former was profitable for 2022. But other divisions such as electricity generation had a banner year.

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For small companies focused solely on in-house supply, the sharp increases in wholesale prices have been catastrophic. More than 30 companies that could not access funds from other divisions or outside investors have gone bankrupt since 2021.

Vendors complain that the cap prevents fair profits. Ofgem responded with plans to change the profit margin allowances. Currently these are set at 1.9 per cent. Design a new variable element.

Assuming a typical annual bill remains around £2,100 from October, the amount customers would pay for suppliers’ earnings would rise from £10 to £47 per customer under the proposals. For British Gas owner Centrica, that could mean an additional £56m in ebit, Jefferies estimates.

Expect anger at industry finances to take a long time to die down.