Watchdog: Energy Firms' Profit Margins Up 700%

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Recent price rises have helped energy suppliers increase their profit margins more than seven-fold, according to estimates by the energy watchdog.

Ofgem has calculated that annual profit margins per customer have risen to £125, from just £15 in June.

Following inflation-busting bill increases over the summer, the regulator estimates the average dual-fuel bill now stands at £1,345.

However, the watchdog expects suppliers' margins to fall back next year.

Ofgem told Sky News Online there were a number of factors contributing to the rise, including VAT, suppliers' operating costs and a 40% increase in the wholesale cost of gas over the last year.

The numbers were revealed as part of a review of reforms which aim to simplify the energy market and make it more competitive.

Under the proposals, standardised pricing information will mean consumers can avoid having to compare the 400 tariffs which currently exist.

Households wanting a no-frills tariff will get a simple unit price and a fixed standing charge set by Ofgem.

"When consumers face energy bills at around £1,345 they must have complete confidence that this price is set by companies competing in a fully competitive market," Ofgem head Alistair Buchanan said.

"At the moment this is not the case."

However, energy firms have reacted angrily to the watchdog's figures.

British Gas slammed the report as "misleading" saying that for the first six months of the year the company's margins per household were actually £24.

Managing director Phil Bentley told Sky News: "Their methodology is flawed excluding, as it does, the discounts we give our customers and the benefits they receive from fixed price contracts, as well as understating our commodity costs.

"In 2010 alone, this methodology overstated industry profits by 100% compared with Ofgem's own analysis of audited accounts."

Scottish & Southern Energy (SSE (Frankfurt: A0RFBG - news) ) said Ofgem's approach was "entirely theoretical" and it "did not recognise in any way" the figure of £125.

SSE added that its own calculations indicated a profit of £62 per dual fuel customer.

The company's the chief executive told Sky News that moves to make the market more competitive may not actually result in cheaper bills for customers.

Politicians have also waded into the debate.

Energy Secretary Chris Huhne welcomed the review, adding: "Both the Government and Ofgem are working to boost transparency in billing and increase competition in the energy market to help keep prices down.

"I want to give Ofgem more teeth and customers more rights, including a faster
switching time and better information from suppliers."

In November, the watchdog plans to publish detailed proposals to help the business sector in particular.

The following month it will make further decisions to "break the stranglehold of the Big Six in the wholesale electricity market".

In the new year, the regulator will publish a report on making energy company accounts more transparent.

According to the watchdog's data, the average dual fuel bill has risen 54% compared to four years ago, whereas wholesale costs have grown 30%.

However Ofgem's calculations also showed that energy suppliers were making a £55 net loss per customer in 2007.