This morning saw the release of a letter from the Energy Secretary to Andrew Wright at Ofgem regarding the energy market assessment being carried out by Ofgem, OFT and the CMA. It has attracted some media attention.
As my colleague Katherine Marshall said last week, we are cooperating fully with the competition audit process. Energy consumers, regulators, politicians, the Government and SSE all want the same thing: a market that not only works for customers but is also trusted to do so. Correspondingly, SSE has a very constructive view of the Ofgem/OFT/CMA process.
The focus of the Secretary of State's letter was that margins in gas supply were higher than in electricity supply last year. I can't speak for others but a key reason why SSE's figures were higher last year was for a very simple reason: the cold weather, which affects the amount of energy used by our 3.3 million household gas customers.
We aim to make equivalent profits in electricity and gas supply, but in gas there are more fixed costs (for transporting the fuel) that make up part of the gas bill which do not vary with short term movements in demand. When we set our prices, and when the network companies set the transportation charges (a process overseen by Ofgem), it is done on an assumption that usage will be at a certain level. But if usage goes up in gas, then there is a greater 'swing' in margins than you get in electricity. In 2012/13, colder weather meant that gas consumption was up around 20%; whilst electricity usage rose less than 5%, so we saw this 'swing' amplified.
Because of annual volatility, SSE has long said it expects to make margins of around 5% in Energy Supply over the medium term. Analysis of the Consolidated Segmental Statements we submit to Ofgem each year shows an average profit margin for us of 5% over the last four years. We reported a £115m loss in our Energy Supply business for the first six months of this financial year.
We want to help customers use less energy. That's one of the reasons why we have set up an Energy Solutions business, focusing on external wall insulation. In one project in Perth, for example, we are helping customers save almost £500 a year on their energy bills.
But as the Secretary of State said on the radio today, let's allow Ofgem and the Office of Fair Trading to carry out the market assessment. And whilst they are doing it SSE will continue to look at other ways to increase trust. Whether it’s quicker switching, more trading, more transparency around profits or making sure environmental and social levies are paid through taxation, SSE will work with anyone committed to action that makes a difference to consumers.