Reading the press, and with numerous current campaigns and calls for independent enquiries one has to ask whether the Big Six energy suppliers are making reasonable profits. Fortunately, Ofgem undertake regular analysis to reverse engineer the published tariffs and arrive at an estimate of the suppliers' net margin. The projected annual combined fuel net margin for a typical dual-fuel customer for the forthcoming 12 months is £70, which based on an average annual bill of £1325 is about 5.2%, significantly lower than many other industries.
Of course, this is only part of the story. Since the large energy companies also generate electricity they can to some extent choose where they report profit by manipulating their internal transfer price. Accordingly, they can keep profits in their upstream generation business to keep sales margins low in the consumer retail end, and thus make it harder for new competition. However, this is no different to any other vertically integrated business, indeed it's pretty much the whole basis of doing big business. So is the accusation of excessive profiteering then one for all large businesses to answer....
The Ofgem report is helpful in providing long term trends and highlights the need to look behind the press headlines for more realistic numbers. For example, in November last year Channel 4 announced energy companies would be making £125 profit per customer per year, up from £15 in June. In reality neither number represents a sustainable business, but both make good headlines.
For the full Ofgem report click here
Some energy companies are taking efforts (with encouragement!) to be a little more transparent about their pricing. Whilst the press look at the headline numbers showing £millions or £bns in profit, these merely reflect the scale of the businesses involved, not the actual profit margin. E.ON has just released it's 2011 Accounts, revealing a 1.68% margin on domestic supply in the UK. In a market affected by rapid swings in energy policy and frequent changes to market incentives, margins that low make it a risky business to be in, and slick account management and customer services is essential for survival.