Understanding trends in energy prices

At-a-glance summary

Direct debit customers have traditionally been offered the cheapest tariffs, followed by standard credit customers and those using prepayment meters. 

The overall cheapest tariffs have continued to be those for direct debit customers. However, the ranking between standard credit and prepayment cheapest tariffs has fluctuated over time. The lowest standard credit tariff on the market remained at £859. Among the large legacy suppliers, the cheapest standard credit tariff increased from £1,044 in January 2021 to £1,093 in February 2021. This was £52 more expensive than the cheapest prepayment tariff, which stood stable at £1,041.

At the end of February 2021, the cheapest direct debit tariff in the market was the same price as the cheapest standard credit tariff, and £125 less than the cheapest prepayment tariff. The cheapest direct debit tariff has historically been at least £100 less expensive than the cheapest standard credit tariff.

E.ON’s acquisition of npower at the start of 2020 has seen customers migrate throughout the course of the year. For the purpose of this indicator, npower’s tariffs are included as part of E.ON’s tariffs.

On 5 February 2021 we announced that the prepayment cap would increase by £87 to £1,156 for six months from 1 April. Several suppliers have already announced price changes that will come into effect in April. These will be reflected in future updates.

Relevance and further information

This indicator helps us understand pricing by payment methods, as well as how much other suppliers are able to compete with the large legacy suppliers for each method. See definition of supplier groups.

Methodology

We calculate the bill values associated with the different tariff types using a ‘typical medium domestic consumer’. As of April 2020, typical domestic consumption values (TDCV) for a medium consumer are 12,000kWh/year for gas and 2,900kWh/year for electricity (profile class 1). The previous typical domestic consumption values (TDCV), that came into effect as of October 2017 were 12,000kWh/year for gas and 3,100kWh/year for electricity (profile class 1). The chart includes collective switching tariffs from Q1 2016.

All tariffs shown in the chart are for a dual fuel customer. Dual fuel refers to a situation where a customer takes gas and electricity from the same supplier.

Tariffs with limited availability depending on customer features (for example, tariffs which are only available to new customers, also known as ‘acquisition’ tariffs, or tariffs restricted to certain regions) are excluded from the calculation to make sure that all tariffs considered are generally available to all customers across GB.

Tariffs available with white label suppliers are included in the calculation of the cheapest tariff. White label suppliers are organisations without supply licenses that partner with an active licensed supplier to offer gas and electricity using their own brand.

Pre-tax supply margins of the large legacy suppliers: At-a-glance summary

Between 2009 and 2016, the average combined gas and electricity pre-tax domestic supply margin across the large legacy suppliers grew from around 1% to around 4%, with significant differences between the suppliers’ margins.

Between 2016 and 2019, profits earned by the large legacy suppliers continued to vary substantially, but generally showed a decrease in the average combined gas and electricity pre-tax domestic supply margin, falling to -1.5% in 2019. All large legacy suppliers experienced a reduction relative to 2018 values, leading to a lower variation across suppliers’ margins in 2019 compared to previous years. All suppliers, except for Centrica, made a loss in the domestic supply segment in 2019. EDF and Scottish Power saw the largest decrease in their margins, falling from 1.8% to -6.1% and from 4.2% to -2.1% respectively. E.ON experienced the smallest change, from -0.3% to -1.3%.

In 2020, OVO completed the purchase of SSE and E.ON acquired npower. The Consolidated Segmental Statements of 2019 are not affected by these sale transactions.

Relevance and further information

This chart helps us understand trends in profits in the domestic supply market and how they differ between suppliers.

Methodology

The supply margins shown in this chart are the ratio between a company’s Earnings Before Interest and Taxes (EBIT) - the ‘pre-tax margin’ - and its total revenues from supplying gas and electricity.

A supplier’s pre-tax margin is calculated by subtracting from a company’s total revenue its total direct costs, total indirect costs (such as operating costs), depreciation and amortisation for supplying energy.

Figures are calculated using information from companies’ annual Consolidated Segmental Statements. They relate to the suppliers’ financial years. Five of the companies (British Gas, EDF, E.ON, npower and ScottishPower) have financial years ending in December, whereas SSE’s financial year runs from April to March. 

The data in this chart may differ from the data that can be found in the company’s externally-published Consolidated Segmental Statements. This is because we have made some adjustments to the way in which exceptional items are reported among suppliers to improve comparability.

How to interpret the year-on-year change in the Supplier Cost Index

The breakdown is calculated by combining the percentage change in each category of expected costs, with an estimate of the importance of that cost to suppliers' total costs. Adding the bars together gives the overall change in the index.

Note, therefore, that the percentages shown are not the same as the percentage change in the individual categories of costs. For example, if the chart shows a one percentage point contribution for wholesale gas this does not mean that wholesale gas costs have risen by 1%, rather that there has been an increase in wholesale gas costs which has caused the overall cost index to rise by 1%. As wholesale gas costs make up only one part of suppliers' overall costs, the percentage increase in these costs would have been significantly higher to result in a 1% increase in the overall cost index.

It is important to bear in mind that the contributions shown relate only to the direct charges to suppliers associated with the different types of costs, and do not take into account the relationships between the categories.

For instance, trends in network charges to electricity generators are not included in the ‘network charges’ component of the breakdown, as they are not paid directly by suppliers – and will instead affect wholesale electricity prices. To give another example, a reduction in wholesale prices (and so the wholesale cost component of the index) will be associated with an increase in supplier payments to fund Contracts for Difference, which support low carbon electricity generation.

For this reason, the contribution of different types of costs to the index cannot be interpreted as showing the totality of the impact of government policies or network charges on consumers’ bills.

Methodology

• We calculate the Supplier Cost Index by estimating trends in network charges, wholesale prices and the charges to suppliers associated with government programmes (note that in some cases, these government charges only apply to large and medium-sized suppliers).
• These estimates are then combined with information on the relative scale of each of these categories of cost to calculate the trend in the overall Supplier Cost Index. The weights given to each category of costs are based on financial statements from the six large suppliers, and are as follows:

- wholesale electricity: 26.7%

- wholesale gas: 35.9%

- networks electricity: 15.4%

- networks gas: 14.4%

- government obligations electricity: 6.7%

- government obligations gas: 1.0%.

• The index reflects estimated expected annual costs, covering the 12 months from the time of each update, based on the best information available at the time. So, for example, the value of the index for May 2018 will reflect estimated costs for the period 1 May 2018 to 30 April 2019, expressed relative to estimated expected annual costs as of the base period (1 January 2015 to 31 December 2015).
• The estimates in the index are forward-looking, they therefore rely on forecasts and assumptions, and so will be subject to uncertainty. Information on suppliers’ realised costs is available in the financial statements published by the six large energy suppliers. See Understanding the profits of the large energy suppliers.
• The index does not include estimates of suppliers' ‘back-office’ operating costs (such as the costs of billing or metering – including the costs of the smart meter rollout) or their profit margins, which suppliers will seek to cover when setting their prices.
• The index is based on trends in the average prices of wholesale gas and electricity forward contracts in the month prior to the update. Suppliers will take different approaches to purchasing their wholesale energy, and many will buy their energy over an extended period. The index does not seek to estimate any impact this may have on a supplier’s costs.
• Other elements of costs are also likely to vary across individual suppliers. For example, suppliers may have some flexibility in how they meet their obligations under government programmes. This could mean, for example, that suppliers see different year-on-year changes in costs than indicated by the index where they have chosen to meet their obligations under the ECO scheme at the start of the delivery period (the forecasts used in the index are based on a flat delivery profile). Network charges will also vary between suppliers depending on things like the regional profile of their customer base. 
• The index is calculated for a customer with typical consumption. We have held consumption fixed over time to increase comparability with trends in suppliers’ prices (which are also typically expressed for a given level of consumption). In practice, energy use will vary from one year to the next, depending on temperatures. Energy use is also subject to long-run trends, for example as a result of increasing energy efficiency. Trends in consumption will also have a significant impact on the size of customers’ bills.
• Capacity market payments were included in the index from winter 2017, we have categorised these as wholesale electricity costs. We consider that this allocation best reflects the nature of these costs. We intend to keep under review what further detail might be provided on the costs associated with different government programmes. 
• Since the August 2017 update, we have included the additional costs associated with the expected exemption of Energy Intensive Industries from the costs of the Renewable Obligation scheme, following the Government’s announcement in December 2017. The Government’s decision on implementing the same exemption for the Feed-in Tariff scheme has yet to be published, and so the possible impact of a similar change to the way this programme is funded is not currently included.

Further details of how we calculate the index are provided in our methodology document.

Further information

This chart is part of our quarterly update to the Supplier Cost Index. For further details, see Understanding the profits of the large energy suppliers.