Snapshots fail to give proper results

Ofgem's energy market indicator is ultimately a hypothetical snapshot. Picture: Ian Rutherford
Ofgem's energy market indicator is ultimately a hypothetical snapshot. Picture: Ian Rutherford
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Last week we saw Ofgem’s energy market indicator estimate that energy companies would be making more than £100 profit supplying energy to a typical customer.

On the same day, in kicking off a Competition and Markets Authority (CMA) investigation into the energy market, the regulator rightly highlighted that there is a trust problem in the sector. For me, this trust problem is not served well by an indicator that is detached from actual profits.

In 2011, Ofgem’s indicator was at one point suggesting suppliers’ profits would be £125, yet the actual audited profit figures showed 2011 margins of £30 per customer.

These profit indications simply do not emerge because the indicator is a limited model; it is based on a number of simplistic assumptions about things such as how much energy customers will use and which tariff they choose, and is ultimately a hypothetical snapshot in time of a variety of costs which move around a lot and should really be judged over a longer period.

Reading too much into the indicator is a little bit like seeing a picture of Wayne Rooney scoring and assuming England did well at the World Cup: it’s a guide but by no means the actual outcome.

The reality is that Ofgem’s State of the Market Assessment analysed actual company accounts.

It showed annual dual fuel profit per household to be £8 in 2009, £35 in 2010, £30 in 2011 and £53 in 2012. Our audited accounts show we made around £48 per household customer in 2013-14.

Energy supply is not and has never been a high-margin industry.

I welcomed the CMA referral because customers need to know they can trust energy markets. And suppliers must do their bit to demonstrate this. That’s one of the reasons we’ve frozen standard prices right through the inquiry until, at least, January 2016 – the longest ever freeze of its kind.

This is a long-term commitment which should also be judged over the longer term as we know many costs will fluctuate during this time.

We are a business that has to focus on the longer term.

This means short-term “snapshots” will never tell the whole story; just as with the England team, the proof is in the results.

• Will Morris is group managing director, retail, at SSE


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