Today Ofgem has published its controversial monthly ‘Supply Market Indicators’. This report always generates headlines because it includes an estimate of how much profit (before tax) a 'typical large energy supplier’ is expected to make per customer during the next 12 months. This month, the figure put forward is £114.
“The SMI includes an estimate of a typical large supplier’s pre-tax margin for the next 12 months,” Ofgem explains. On the face of it this seems pretty straightforward.
But there’s a problem. Ofgem continues: “This is not a statement of their current or future profits. It should not be compared with company results for the following reasons:
- Companies still have to pay taxes as well as fund debt payments out of this money.
- Actual margins will depend significantly on future consumption levels, especially for gas, which are affected by the weather.
- The SMI is forward looking only and does not provide information on historic company results.
Ofgem can be congratulated for acknowledging the limitations of its own indicator. Viewed through the right lens, the Supply Market Indicators can be a helpful insight into the general costs that go into customers’ bills, and that’s all they are intended to be.
However, the problem is that in many quarters this information is presented as a factual depiction of profitability. When June’s figures were published, one newspaper front page declared: “energy sharks make £101 profit per family”; another responded to July’s publication with the front-page story: “energy firms double profits”.
That’s despite the fact that even the most cursory historical analysis will show that the SMI has a history of indicating profits that do not actually materialise. Despite the SMI showing margins up at around £100 at various points, our fully audited accounts show that we actually made less than £50 per customer in 2013/14.
At SSE, we are very transparent about the profit we make and where we make it. As a UK-listed company, we publish full and frank financial accounts every year for all to see. We understand that the cost of energy is a real worry and that, as energy is one of life’s essentials, the profit we make must be fair and should be subject to scrutiny.
However, the reality is that the costs that go into supplying energy are many and varied, and different suppliers take different approaches to managing them as they compete for customers.
Ofgem is the first to admit that its SMIs are indicative only and based on certain generalised assumptions about how energy suppliers go about buying gas and electricity in forward markets. In short, its ‘typical large supplier’ is an interesting reference point but in practice it does not actually exist.
For example, when our customers told us they were worried about energy prices, we wanted to give them peace of mind. So we made the longest ever unconditional promise not to increase prices – a promise we recently extended until July 2016, meaning SSE customers will be at least two and a half years without a price increase. We also said we’d cut prices if we could, and that’s what we announced this week.
Our price freeze was widely welcomed by customers, consumer groups and all types of politicians as a bold move to help customers. The point is we simply couldn’t have done it if we’d behaved like Ofgem’s ‘typical large supplier’.
So what this boils down to is that while the SMIs are meant to help inform customers, if wrongly presented or taken out of context there is a real danger that they can confuse people. But with SSE, we will always be transparent about the profit we make, offer stable prices that give long-term peace of mind and reduce prices when we can. Nobody really knows where world energy prices will go next, although many pundits will, no doubt, continue to shamelessly exploit the benefit of 20:20 hindsight. One thing that our customers can rely on is that there will be no increases before July 2016.