Energy firms' profits soar, as they hike our prices

Industry regulator Ofgem says the average annual dual fuel bill has risen by £175, and by November, the typical bill will hit £1,345.

However, energy firms dispute the profit figures.

The regulator expects profit margins to fall back next year, but says the market is still stifled by complex tariffs, poor behaviour by suppliers and a lack of transparency in the market.

It intends to push ahead with reforms, the first of which will be the introduction of a simplified standard tariff, based on a simple unit price for energy used and a standing charge, which Ofgem will set.

Many firms charge more for the first set of units used than they do for the rest, making bills complicated to understand.

Ofgem says simpler bills will allow consumers to compare the differences between a standard energy supply contract and more complex deals. Customers who choose the more complex deals will also get protection against price increases for the duration of a contract, the regulator adds.

'Reform needed'

Ofgem chief executive Alistair Buchanan says a "radical break" with the past is needed.

"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. At the moment that is not he case", he says.

Suppliers have already started to move to address some of the regulator's concerns.

Earlier this week, Scottish & Southern Electricity announced plans to sell all of the electricity it generates on the open market, compared with the regulator's proposals that 20% of all supplies must be auctioned by 2013.

This may help new entrants, who cannot source their own energy, enter the market.

Consumer groups have welcomed Ofgem's drive to simplify bills, though Consumer Focus chief executive Mike O'Connor says he is awaiting the response of the energy suppliers.

"Consumers are faced with a thicket of energy tariffs that can seem designed to confuse all but the most persistent and numerate consumers. More than 60 new tariffs have appeared so far this year, despite all the pressure for fewer and simpler tariffs," he says.

Which? executive director Richard Lloyd adds: "This will help remove some of the complexity and confusion in the energy market that infuriates consumers.

"We think a simple format should be applied across all tariffs, so that people can compare the full range of energy deals at a glance."

Price hikes

Rising utility bills helped push consumer price inflation up to 4.5% in August and are forecast to send it close to, or even above, 5% as all of the recently-announced increases come into effect

Scottish Power was the first of the major groups to raise prices when it put gas tariffs up by 19% and its electricity charges by 10% from August 1.

Market leader British Gas increased gas bills by 18% and electricity by 16% in August, while in September Scottish and Southern Energy raised electricity by 11% and gas by 18%, along with E.ON, which increased its electricity prices by 11.4% and gas by 18.1%.

Npower raised gas prices by 15.7% and electricity by 7.2% from October 1, while price rises of 15.4% for gas and 4.5% for electricity come into effect for EDF customers on November 10.

Shadow energy secretary Caroline Flint says: "People will be shocked, if not surprised, that, at a time when millions of families are struggling with their energy bills, utility companies are enjoying soaring profits.

"With forecasts of a bitter winter looming, it's more important than ever that families are not being ripped off.

"The Government has to get a grip on energy bills. It's not good enough to tell people to shop around. We need fundamental reform of the energy market, to break the stranglehold of the big six, allowing new entrants, increasing competition and driving down energy bills for families."

Figures disputed

British Gas, however, says Ofgem's methodology to calculate profits is flawed.

Managing director Phil Bentley says: "Ofgem's report is misleading. Its 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. Our own audited accounts show that, for the first six months of this year, our margins per dual fuel household were £24 after tax. In 2011, profits will be lower than 2010."