In Britain’s energy market, suppliers compete on price and service to win customers. In setting their prices, suppliers will seek to cover their costs and to make a profit. They face pressure to keep their prices and costs down, or else risk losing customers to their rivals.
With the exception of updating the price cap protecting prepayment customers (effective from April 2017), Ofgem does not have a role in setting energy prices, nor do we regulate suppliers’ profits. We cannot predict what prices companies will set and when prices will change – these are decisions taken by the suppliers themselves.
We do have a role to provide impartial and authoritative data about the energy market. As part of this, we publish information about the prices that households pay for their energy, the profits suppliers make and the trends in the industry costs that suppliers face. This helps to improve transparency around trends in prices, and what may be driving them.
We are also working to facilitate a more competitive, dynamic energy market, with more engaged consumers. Over time, we expect the changes we make to the retail markets to increase the competitive pressure that suppliers face, and so help to keep energy prices down.
In the charts below you can view recent trends in prices for domestic customers split by tariff type and payment method, and trends in suppliers’ domestic pre-tax profit margins. Select the 'more information' tab in the chart for a summary of the latest trends and details of the methodology used.
You can find further information on trends in prices and profits in our reports on the retail and wholesale energy markets, and on our page Understanding the profits of the large energy suppliers.
To provide insight into the most recent developments in the costs suppliers face, we publish a Supplier Cost Index.
The index tracks ongoing trends in wholesale costs, network costs and the charges to suppliers associated with government programmes that are designed to, for example, help deliver low carbon electricity and energy efficient homes, and provide direct financial support to the fuel poor.
Note that while the index gives insight into current and future cost pressures, it is neither able nor intended to predict what prices suppliers will set or when these will change. The costs that individual suppliers incur in supplying their customers may vary significantly from the index. For example, while the index reflects the level of wholesale prices in the month prior to the update, some companies may buy energy for their customers over an extended period of time to smooth their costs.
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.
Supplier Cost Index
Select a chart for our estimates of the latest trends in the cost index, and what is behind these.
Summary: May 2017
- The Supplier Cost Index (dual fuel) fell by 6% between 1 February and 1 May 2017. This is largely a result of reductions in gas and electricity wholesale prices, as commodity prices have gone down and – for electricity - capacity margins have eased.
- The recent reductions follow a period of sharp cost increases in the second half of 2016. Wholesale prices are still significantly above their levels in early 2016, meaning that the index remains around 15% higher on 1 May 2017 compared to 1 May 2016.
- Looking further back, the period up to spring 2016 saw a sustained period of falling costs. Reductions over that period were much larger for gas than electricity. The overall index is still around 4% below its level at the start of 2015: with the electricity index now around 5% higher than its level as of 1 January 2015, and the gas index around 13% lower.
- The value of the Supplier Cost Index as of 1 May is based on average wholesale prices in April 2017 for delivery in the following 12 months. It is common among the large suppliers to purchase energy for customers on their ‘standard variable’ tariffs over an extended period (up to two years or more). This can create a lag between the latest movements in wholesale prices (as shown by the Index) and the costs suppliers incur for these customers. The extent of the lag will vary depending on different suppliers’ approaches to purchasing energy.
- As well as higher wholesale prices compared to 1 May 2016, there has been some upwards pressure over the past 12 months due to increases in the expected charges to suppliers associated with government obligations (particularly those supporting renewable and low-carbon electricity generation). However, these increases account for only a small part of the rise in the dual fuel index over the past year (less than 2 percentage points out of the 15% increase). They have been offset by reductions in network charges.
- Note that the direct costs to suppliers in relation to government programmes that are captured in the Supplier Cost Index reflect only part of their impact on suppliers’ costs and consumer bills. For example, the Energy Company Obligation supports the installation of energy efficiency measures, which are expected to reduce energy consumption and so lower bills. Because the cost index is calculated for a fixed level of consumption, it does not reflect this effect.
- There are likely to be some additional upwards pressures on costs in the remainder of 2017 and into 2018. From October, suppliers will be required to make capacity market payments to help ensure that there is sufficient generation capacity. The costs associated with supporting renewable and low-carbon electricity generation are also currently expected to rise further, and there may be further pressures on the costs of supplying a domestic customer from the proposed exemption for energy intensive industries from payments for certain government programmes (currently this is excluded from the index).
Technical note: for this quarter’s update we have updated the weights used to calculate the index (using the latest financial statements of the large suppliers), and restated the series on this basis. This ensures that we are using the most recent information available to calculate the relative importance of different elements of suppliers’ costs. We have also brought the base period forward a year, from January 2014 to January 2015 (to maintain the index’s focus on short- to medium- term trends in costs). Both of these changes follow the approach described in our methodology document, published in January.
- 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 as of the base period in January 2014 are as follows: wholesale electricity - 27.5%, wholesale gas - 35.2%, networks electricity - 15.0%, networks gas - 13.3%, government obligations electricity - 7.6%, government obligations gas - 1.3%.
- 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 January 2017 will reflect estimated costs for the period 1 January 2017 to 31 December 2017, expressed relative to estimated expected annual costs as of the base period (1 January 2014 to 31 December 2014).
- As the estimates 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 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. We are working to facilitate a more competitive, dynamic energy market, with more engaged consumers. Over time, we expect the changes we make to put more pressure on suppliers to keep such back-office costs down.
- 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, which we have held fixed over time to increase comparability with trends in suppliers’ prices (which are also typically expressed for a given level of consumption). In fact, 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 for winter 2017 are now included in the index. In contrast to the methodology document published in January, we have categorised these as wholesale electricity costs. We welcome views on how these and other costs associated with government’s electricity market reform programme might best be categorised within the cost index, in light of the interactions between what is classed as ‘wholesale electricity’ and ‘government obligation’ costs. Please see below for contact details.
Further details of how we calculate the index are provided in our methodology document.
We are always looking for ways to improve our data. If you have feedback, please contact us at marketmonitoring@ofgem.gov.uk.
Below you can view publications and updates relating to our monitoring of suppliers' costs, and earlier monitoring under the Supply Market Indicator.