Electricity and Gas Supply Market Indicators 

Updated: 15th May 2013 

Overview

Ofgem produces a rolling average net margin on supplying a typical standard tariff, dual fuel customer.¹ This is an average of the estimated net margin data for the previous six months, the current month, and the next six months.²  We also produce a snapshot estimate of the net margin on supplying a typical, standard tariff dual fuel customer for the next 12 months.

Our latest calculations show that the rolling average net margin for a typical, standard tariff, dual fuel customer is approximately £100. This is the same as last week.   

Our estimates also show that for the forward looking 12 month period from this week, the total indicative net margin will be approximately £95 per typical, standard tariff, dual fuel customer based on a current average annual bill of £1,420 per year. This is also the same as last week.

The SMI uses an 18 month hedging strategy to estimate supplier wholesale costs.  However, we recognise that suppliers may hedge over different periods of time. These hedging periods will have an effect on the costs that suppliers incur. For example, using both 12 and 24 month hedging strategies, wholesale costs would be £5 higher. The indicative snapshot net margin would therefore be £5 lower, at £90.   

Our analysis currently suggests that wholesale costs are likely to rise in the coming weeks, which we estimate will reduce the margin to £95 towards the end of summer. However, there are many uncertainties, not least continued changes in wholesale and retail prices, which could affect this figure. 

Our approach is to update cost estimates where appropriate. Previous updated assumptions are listed at the end of the report .³

¹ This estimate is one indicator of supplier margin, however there are others. For example, Ofgm requires the large, vertically integrated suppliers to publicly report a Consolidated Segmental Statement (CSS). The CSSs provide separate revenues, costs and profits for generation and for domestic/non-domestic electricity and gas supply. The CSSs are published on each supplier's website. Links to the 2011 statements can also be found on the Ofgem website at: http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=317&refer=Markets/RetMkts/rmr

² A detailed description of the rolling average net margin indicator can be found in our methodology statement, available at: http://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Documents1/SMR_METHODOLOGY.pdf

³ Note our estimate of costs for the CERT/CESP environmental programmes is based on the Government's Impact Assessment and assumes costs are incurred evenly over the period of the obligation. There is anecdotal evidence that recent costs of delivering these obligations have increased, which may at least in part be due to suppliers needing to deliver a disproportionate share of measures in later years. If this is the case, this is not reflected in our estimates.

Typical dual fuel customer bill, costs and total indicative net margin for the next 12 months

Typical electricity customer bill, costs and total indicative net margin for the next 12 months

Typical gas customer bill, costs and total indicative net margin for the next 12 months

Changes in retail bills, costs and total indicative net margin for the next 12 months – May 2013

Methodology

In March 2012, we moved from publishing our supply market indicators on a quarterly to a weekly basis. Our methodology has not changed from that used in the quarterly reports. The only difference was the addition of a rolling average net margin figure. We introduced this indicator to increase transparency about net margin levels. As the net margin figure can vary significantly in a year, in reaction to falling or rising costs, a balanced alternative measure is to consider the average margin over an extended period of time. This then smoothes out fluctuations in volatile net margin figures. Please see our methodology for the Supply Market Report [PDF].

Notwithstanding the introduction of a rolling average net margin indicator to the supply market indicators, it is important to remember that it is a forward-looking estimate of the net margin on supplying a typical, standard tariff, dual fuel customer. It is therefore likely to change over time as more information on costs and prices becomes available. It also does not capture all the discounted deals that may be available to consumers, including those available online.

More comprehensive information on individual energy companies’ revenues, costs and profits in both their generation and supply arms is available on a backward-looking basis through their Consolidated Segmental Statements. These are produced annually by energy companies and are available on the Ofgem website. The requirement to produce these accounts was introduced by Ofgem following our Energy Supply Probe in 2008.
 

Updating our assumptions

Our estimate of net margin is based on numerous assumptions. These include assumptions about typical household energy consumption and estimates of suppliers’ costs. We will periodically review these components in due course and will look to update our assumptions as they change, including for example, updating our consumption information. We may also utilise requests for information where this is the most appropriate route to gather data. In the meantime, if suppliers wish to provide us with updated information we will be happy to consider utilising it in the report. 

Where we update our data, we will keep a log of when a change takes effect and a short description, as below.

Updates to assumptions used:

29 April 2013 - update to electricity network charges in 'other costs'

20 February 2013 - update to Renewable Obligation costs

13 February 2013 - updated electricity network charges in 'other costs'

6 February 2013 - updated assumptions for Feed in Tariff costs

21 January 2013 - updated retail bill reflecting a price change announcement

17 January 2013 - updated suppliers' market shares

10 January 2013 - update to our assumptions for the Energy Company Obligation

12 December 2012 - updated retail bill to reflect a price change announcement

05 December 2012 - updated retail bill to reflect a price change announcement

28 November 2012 - updated retail bill to reflect a price change announcement

21 November 2012

• updated retail bill to reflect a price change announcement
• update to our retail bill data based on information provided by suppliers

31 October - updated retail bill value to reflect a price change announcement

24 October 2012:

• updated payment method shares (direct debit, standard credit and prepayment);
• updated retail bill reflecting price change announcements;
• updated assumption to forward network charges and balancing charges;
• update to cost of Feed in Tariffs;
• update to Renewable Obligation costs, accounting for higher obligation

19 September 2012 - updated suppliers' market shares

17 July 2012 - updated suppliers' market shares

2 July 2012 - updated suppliers' market shares and updated payment method shares (Direct Debit, prepayment and standard credit)

20 June 2012 - update to other costs including the inclusion of ECO in the model

21 May 2012 - updated suppliers' market shares