Energy firms accused of deceiving customers over profits

energy prices

THE Big Six energy providers have been accused of misleading the public about their profits, after a report showed that their costs were measured against cheaper tariffs rather than standard variable tariffs (SVTs).

simon chandler
By Simon Chandler

The report - commissioned by industry body Energy UK and made by PricewaterhouseCoopers (PwC) - broke down a "typical" bill into six categories: wholesale costs, operational costs, environmental and social policy costs, network costs, VAT, and supplier margins (i.e. profit).

Yet for the year 2016/7, these six categories came to a total of £920, a sum markedly lower than the price customers on standard variable tariffs often have to pay.

However, while this would suggest that the big providers have been dishonest about their profit margins, the "real" profits reported by certain media outlets (e.g. The Sun, who originally broke the story) are also misleading, since not every energy customer is on the high SVT used for the unfavourable comparison.

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This SVT was £1,172, while the total costs were £886. This means that the "average" profit for the average Big Six provider is apparently £286 (although for some reason The Sun reports this as £272).

Given that Energy UK had told the Competition and Markets Authority (CMA) in June that the profit margin in the industry is only 3.3% (or £37), the opposition to a £286 profit is understandable, since it equals a margin of 24%.

And opposition to this figure is more understandable in view of how the CMA backed down earlier in the year from imposing price controls on the industry, partly because they were under the impression that profit margins in the industry were so tight.

As a result, the revelation that the profits of the Big Six are much bigger than first reported is something of a bombshell, because it would renew the call and the pressure for a price cap or some other radical measure to be imposed.

Punishment

At the very least, it has led Greg Clark, the Business and Energy Secretary, to order an investigation into claims first originating in The Sun.

Speaking of the PwC research, he said, "This report appears to confirm my concern that the big energy firms are punishing their customers' loyalty rather than respecting it".

In many ways, the Big Six are punishing loyalty, or are at least profiting from the failure of many of their customers to switch tariff and provider often enough to save money.

This is because, even though the numbers of people switching is according to Energy UK [PDF] increasing month-on-month, only 12% and 13% of customers [PDF] switched their electricity and gas supplier in 2015.

Yet while these relatively small percentages indicate that the big energy providers have space to take their customers for granted and reap extra profits, the way PwC's report has been presented in the media is almost as deceptive as The Sun accuses the energy industry itself of being.

SVTs

For one, the paper's reporting of it uses an SVT of £1,127 to widen the "average" profit, yet the simple fact is that not every energy customer is on an SVT.

In fact, Ofgem state that the percentage of people on SVTs fell between 2015 and 2016, from 69% to 66%.

The Sun article is very misleading on profits being made from consumers on standard variable tariffs.
Energy UK

As such, the "real" average profit is considerably inflated, failing to account for the 34% of customers not on the most expensive tariffs.

And as Energy UK told Choose in response to the accusations, "The numbers presented in the PwC report and on the Energy UK website are averages across all tariff types."

Because of this, it's not particularly meaningful to compare the price of an expensive SVT against the costs highlighted in the PwC report, since these are average costs that include the lower expenses for cheaper tariffs.

Open secrets

Still, even if the "real" profit inferred from the PwC report is probably quite inaccurate, there are still two things that could be said against the energy industry.

Firstly, Ofgem state that the "average available tariff" as of August 2016 works out at £1,066 per year for customers. This may not be as high as £1,172, but it still results in a profit of £180 (or 16.9%).

Secondly, while The Sun undoubtedly exaggerated when they say they'd unearthed a "secret" report, it's worth noting that the version [PDF] of this report published on the Energy UK website doesn't include the annexes where actual profits are calculated.

In response to this intentional or unintentional omission, Energy UK told Choose, "The final report is published on the Energy UK website. The Sun report is based on one of [several] drafts."

This may be so, yet it's nonetheless interesting that the draft of the report made available to customers is the one that doesn't provide a breakdown in pounds of their bills.

Maybe the failure to include one was perfectly innocent on their part, yet at the very least it underlines the need for customers to be constantly vigilant of what exactly their energy suppliers are doing and charging, and to switch supplier if they feel they aren't getting a good deal.

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