Understanding trends in energy prices

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. 

The latest trends in suppliers’ prices and profits 

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.

Chart

Source: Energylinx.

Information correct as of: December 2016

This chart shows trends in domestic energy bills by tariff offered by the six large suppliers and other suppliers. It compares their average standard variable tariffs with the cheapest tariffs available in the market (including white label tariffs). Figures are based on a typical domestic dual fuel customer paying by direct debit. 

This information should not be used as a price comparison tool. To find out about accredited price comparison sites, see our impartial guide at Be An Energy Shopper.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Retail price comparison by company and tariff type: Domestic (GB)
DateAverage standard variable tariff (Six large suppliers)Average standard variable tariff (Other suppliers)Cheapest tariff (Six large suppliers)Cheapest tariff (All suppliers)Cheapest tariff (Basket)
28/01/20121020.161026.33915.27906.56947.56
28/02/20121000.761019.41886.18878.10930.29
28/03/2012997.251019.41886.18878.10936.54
28/04/2012997.251019.35895.69878.10937.68
28/05/2012997.251019.35895.69878.10929.78
28/06/2012997.251036.16895.69895.69945.53
28/07/2012997.251034.16895.69875.93928.99
28/08/2012997.251032.02899.10875.93924.85
28/09/2012997.251019.84901.47875.93931.04
28/10/20121009.001022.51906.17893.85956.00
28/11/20121030.781046.91958.21909.59997.71
28/12/20121061.801089.65990.70909.59994.59
28/01/20131074.421089.65957.18909.59990.81
28/02/20131074.421103.04957.18909.59994.56
28/03/20131074.421103.04966.54909.59995.50
28/04/20131074.421115.23966.54909.59988.37
28/05/20131074.431115.23966.54962.43997.77
28/06/20131074.431115.23966.54769.95967.26
28/07/20131074.451115.23984.68769.95974.82
28/08/20131074.451115.23971.77769.95988.47
28/09/20131074.451115.23971.77769.95979.55
28/10/20131074.451129.021011.80769.95995.67
28/11/20131105.941133.08993.40769.95992.26
28/12/20131138.951133.081033.47769.95997.00
28/01/20141145.841134.251033.47975.211013.73
28/02/20141134.091139.371033.97966.341014.19
28/03/20141128.101136.041024.79964.311016.25
28/04/20141128.101139.051000.38946.42995.26
28/05/20141128.101139.051000.38944.55995.13
28/06/20141128.101139.051000.38944.55992.88
28/07/20141128.101142.671000.38944.95976.39
28/08/20141128.101140.961000.38943.43978.98
28/09/20141128.101171.97960.90942.27972.34
28/10/20141128.101145.38953.40931.02960.15
28/11/20141128.101145.38921.88914.51947.94
28/12/20141128.101144.09916.21906.14929.69
28/01/20151124.331144.09875.40871.26895.39
28/02/20151106.651117.66839.28839.28881.39
28/03/20151106.651102.05836.99836.99892.38
28/04/20151106.651087.00834.57834.57878.56
28/05/20151102.281084.78835.19830.56877.12
28/06/20151102.281084.78835.71830.56871.21
28/07/20151102.281084.78863.85830.56867.88
28/08/20151098.031084.78876.03830.56868.79
28/09/20151098.031074.07876.03830.56858.62
28/10/20151098.031068.87803.00798.67829.34
28/11/20151098.031052.45805.40787.05814.85
28/12/20151098.031063.10850.52787.05806.98
28/01/20161098.031061.63769.69765.00786.27
28/02/20161092.691046.39690.33690.33749.44
28/03/20161071.441038.50727.70727.70756.05
28/04/20161065.971014.78723.91723.91751.58
28/05/20161065.971013.38723.23723.23742.71
28/06/20161065.971020.57723.23723.23751.36
28/07/20161065.971023.81779.39758.31779.72
28/08/20161065.971016.87801.37769.65789.25
28/09/20161065.971019.16754.64744.30777.00
28/10/20161065.971037.62803.54741.92792.25
28/11/20161065.971052.12897.18862.01874.62
28/12/20161065.971028.02951.51870.03888.17

More information

At-a-glance summary

From the start of 2014 until early 2016, the price difference significantly increased between the average standard variable tariff and the cheapest tariff available in the market. This is because the price of the cheapest tariffs fell at a much faster rate than that of the average standard variable tariff. The differential peaked in February 2016 at well above £300. Since then, the cheapest tariff in the market and that offered by the six large suppliers have increased by around 26% and 38% respectively, driven in part by increases in wholesale prices. As a result, there has been a fall in the price differential relative to the average standard variable tariff for the six large suppliers. As of December 2016, this price differential had fallen to around £200.

We have recently introduced a new indicator showing the average of the cheapest tariffs from the ten cheapest suppliers in the market. The differential between this indicator and the average standard variable tariff for the six large suppliers stood at around £180 in December, compared to around £270 in October.

Relevance and further information

Tariff differentials reflect pricing in different market segments, as well as how much other suppliers are able to compete on price with the six large suppliers.

Methodology

We calculate the bill values associated with the different tariff types using a ‘typical medium domestic consumer’. As of September 2015, typical consumption values for a medium consumer are 12,500kWh/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, direct debit customer.

Dual fuel refers to a situation where a customer takes gas and electricity from the same supplier.

A standard variable tariff refers to a supply contract which is for a period of an indefinite length and which does not contain a fixed term period that applies to any of the terms and conditions. It’s an energy supplier’s basic offer. If a customer does not choose a specific energy plan, for example after their fixed tariff ends, they will be moved on a standard variable tariff until they have chosen a new one. A customer can also make an active choice to select a standard variable tariff.

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 tariffs. White label suppliers are organisations without supply licenses that partner with an active licensed supplier to offer gas and electricity using their own brand.

To calculate the average of the cheapest tariffs from the ten cheapest suppliers we took the cheapest tariff offered by each supplier in the market (i.e. one tariff per supplier) and then ranked the tariffs in order of price. We then took the simple average of the ten cheapest tariffs in this list. This method is to ensure a cross section of suppliers is included in the calculation.

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Chart

Source: Energylinx.

Information correct as of: December 2016

This chart compares the cheapest available tariffs offered by the six large suppliers with the cheapest tariff available in the market by payment method (direct debit, standard credit and prepayment). Figures are based on a typical domestic dual fuel customer.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Cheapest tariffs by payment method: Typical domestic dual fuel customer (GB)
DateLarge six suppliers (direct debit)Large six suppliers (standard credit)Large six suppliers (prepayment)Market (direct debit)Market (standard credit)Market (prepayment)
28/01/2012915.27976.71021.54906.56971.04969.61
28/02/2012886.18976.71021.54878.1971.04969.61
28/03/2012886.18976.71021.54878.1971.04969.61
28/04/2012895.69953.41021.54878.1953.4969.24
28/05/2012895.69953.41021.54878.1890.12969.24
28/06/2012895.69953.41021.54895.69953.41017.42
28/07/2012895.69953.41021.54875.93953.41017.42
28/08/2012899.1957.031021.54875.93957.031017.42
28/09/2012901.471020.711021.54875.93988.141017.42
28/10/2012906.171020.711069.39893.85988.141019.3
28/11/2012958.211020.711069.39909.59979.351045.64
28/12/2012990.71071.381133.19909.59979.351045.64
28/01/2013957.181037.21133.19909.59979.351045.64
28/02/2013957.181037.21133.19909.591037.21045.64
28/03/2013966.541046.571133.19909.591046.571045.64
28/04/2013966.541046.571133.19909.591046.571045.64
28/05/2013966.541046.571133.19962.43996.91045.64
28/06/2013966.541046.571133.19769.95996.91045.64
28/07/2013984.681075.511133.19769.95996.91045.64
28/08/2013971.771051.791133.19769.951051.791045.64
28/09/2013971.771051.791133.19769.951051.791045.64
28/10/20131011.81079.911133.19769.951070.991093.35
28/11/2013993.41058.151150.97769.951058.151093.35
28/12/20131033.471101.651178.61769.951101.651093.35
28/01/20141033.471101.651178.61975.211101.651172.77
28/02/20141033.971108.11178.61966.341108.11172.77
28/03/20141024.791117.271178.61964.311117.271171.39
28/04/20141000.381069.951178.61946.421069.951171.39
28/05/20141000.381069.951178.61944.551069.951171.39
28/06/20141000.381069.951170.86944.551069.951162.4
28/07/20141000.381069.951170.86944.951029.051162.4
28/08/20141000.381069.951170.86943.431038.881154.43
28/09/2014960.91030.951170.86942.271030.951154.43
28/10/2014953.41046.451170.86931.021024.451154.43
28/11/2014921.881003.791170.86914.511003.791154.43
28/12/2014916.211003.791170.86906.141003.791151.22
28/01/2015875.4945.461148.99871.26945.461148.99
28/02/2015839.28955.071148.9839.28950.351148.9
28/03/2015836.99907.241148.99836.99907.241116.99
28/04/2015834.57977.561141.64834.57977.561131.6
28/05/2015835.19905.441141.64830.56905.441131.6
28/06/2015835.71981.781122.97830.56940.91122.97
28/07/2015863.85981.781122.97830.56939.851122.97
28/08/2015876.03977.321128.54830.56940.271128.54
28/09/2015876.03963.771128.54830.56907.261100.94
28/10/2015803873.251128.54798.67844.041100.94
28/11/2015805.4950.751128.54787.05844.041055.61
28/12/2015850.52950.751102.2787.05844.041055.61
28/01/2016769.69839.941102.2765839.941055.61
28/02/2016690.33808.631092.26690.33808.631054.2
28/03/2016727.7797.761070.37727.7797.761051.22
28/04/2016793.36873.411070.37733.99793.481030.27
28/05/2016723.23877.121037.31723.23877.121017.61
28/06/2016723.23847.451037.31723.23847.451025.39
28/07/2016779.39904.971037.31758.31871.541017.61
28/08/2016801.37941.421043.54769.65871.541017.61
28/09/2016754.64830.111043.54744.3830.11990.56
28/10/2016803.54967.131043.54741.92900.76990.56
28/11/2016897.181002.631035.64862.01937.921017.72
28/12/2016951.511031.571035.64870.03923.481017.72

More information

At-a-glance summary

Direct debit customers are offered the cheapest tariffs, followed by standard credit customers and then those using prepayment meters. The gap between the cheapest tariff on standard credit and direct debit was relatively stable over 2015 and 2016 at around £100, although it has fallen to just over £50 in December 2016 as a result of an overall increase in the cheapest tariffs.

The gap between the cheapest prepayment and direct debit tariff peaked at around £360 in February 2016 and then fell to around £150 in December 2016. This was due to large increases in price of the cheapest direct debit tariff, as well as a fall in the price of the cheapest PPM tariff.

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 six large suppliers for each method.

Methodology

We calculate the bill values associated with the different payment methods using a ‘typical medium domestic consumer’. As of September 2015, typical domestic consumption values for a medium consumer are 12,500kWh/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.

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Chart

Source: Companies’ consolidated segmental statements.

Information correct as of: August 2016

This chart shows the combined gas and electricity pre-tax domestic supply margins of the six large suppliers. It is based on information reported by the large suppliers in their annual Consolidated Segmental Statements, which also cover the margins obtained by these suppliers in the non-domestic supply and generation businesses. For more information, please see Understanding the profits of the large energy suppliers.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Pre-tax domestic supply margins of large suppliers, combined gas and electricity
CentricaE.ONEDFnpowerScottishPowerSSEAggregate
20097.59%-2.62%-7.50%-6.93%1.72%2.31%0.89%
20108.88%0.48%-3.87%-4.66%-0.17%5.95%3.04%
20116.86%1.98%-4.84%-1.81%-0.43%5.77%2.80%
20126.64%2.26%-3.04%3.61%4.51%6.36%4.25%
20136.14%4.01%-2.76%3.41%4.77%3.91%3.94%
20145.30%5.06%-0.24%2.65%5.79%6.04%4.46%
20156.96%4.52%-0.69%-6.78%5.67%6.25%3.95%

More information

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

Between 2009 and 2015, the average combined gas and electricity pre-tax domestic supply margin looking across the six large suppliers grew from around 1% to around 4%, although there were significant differences between suppliers. British Gas reported an increase in its domestic margins from 5.3% to 7.0% between 2014 and 2015, while SSE reported a smaller increase from 6.0% to 6.2% year-on-year. In contrast, npower incurred significant losses in 2015 with its domestic supply profit margin of -6.8% down from 2.7%. The combined margins of the other large suppliers also fell although by smaller amounts.

Relevance and further information

This chart helps us understand trends in profits for the domestic supply market and how it differs between suppliers.

Methodology

The supply margins shown in this chart are calculated as the ratio between a company’s Earnings Before Interest and Taxes (EBIT) – which we also refer to as suppliers’ pre-tax margins and its total revenues from supplying gas and electricity.

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

Figures are calculated using information from companies’ annual Consolidated Segmental Statements (CSS) and 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.

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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

The latest trends in suppliers’ costs

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 ensure security of supply, 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. 

Chart

Javascript is required to render chart Supplier Cost Index by fuel type (GB).

Source: Ofgem analysis.

Information correct as of: 1 January 2017

The Supplier Cost Index tracks ongoing trends in wholesale costs, network costs and the charges to suppliers associated with government programmes.

At-a-glance summary

  • The Supplier Cost Index is around 15% higher in January 2017 compared to a year earlier. This is primarily because of increases in wholesale gas and electricity prices.
  • The steep rise in the second half of 2016 follows a long period of falling costs between the start of 2014 and early 2016. Reductions over the period were much larger for gas than electricity. The index remains below its level at the start of 2014.
  • Note that the index is based on trends in wholesale gas and electricity prices in the month prior to the update. It therefore does not take into account the impact of longer-term hedging strategies.

We update this chart on a quarterly basis. Click the ‘more information’ tab above for a description of how the index is calculated and which costs are included.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Supplier Cost Index by fuel type (GB)
Expected supply costs for the next 12 months (Jan-14 = 100)Dual FuelElectricityGas
Jan-14100100100
Feb-1497.297.896.7
Mar-1494.595.893.3
Apr-1494.896.293.4
May-1492.394.390.3
Jun-1491.594.188.9
Jul-1490.193.586.8
Aug-1489.393.485.3
Sep-1492.496.588.2
Oct-1493.298.188.3
Nov-1492.397.986.7
Dec-1492.29886.4
Jan-1590.696.984.3
Feb-158592.877.1
Mar-1588.195.380.9
Apr-1586.993.979.8
May-1586.794.179.2
Jun-1585.99477.9
Jul-1585.794.277.2
Aug-1585.194.276.1
Sep-1583.593.473.5
Oct-1583.59472.9
Nov-1582.593.671.3
Dec-1580.893.468.2
Jan-1679.693.166.1
Feb-167791.262.7
Mar-1676.991.762
Apr-1677.893.262.3
May-1678.593.963.1
Jun-1680.795.865.4
Jul-168599.870.2
Aug-1688.6103.274
Sep-1686.7102.171.2
Oct-1686.4102.969.9
Nov-1696.4115.976.8
Dec-1696.9115.977.7
Jan-1791.2106.475.9

More information

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 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 increase the 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. Network charges will 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.

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

This chart is part of our quarterly update to the Supplier Cost Index. For further details, see Understanding trends in energy prices.

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Chart

Source: Ofgem analysis.

Information correct as of: 1 January 2017

This chart shows the contribution of trends in different cost categories to the overall year-on-year change in the Supplier Cost Index.

At-a-glance summary

  • Between January 2016 and January 2017, the Supplier Cost Index increased by 14.5%.
  • The chart shows that the biggest factor in the increase compared to a year before is the significant rise in expected wholesale costs. Increases in wholesale electricity and gas prices pushed the index up by 6.0 and 6.6 percentage points respectively. Note that the index is based on trends in wholesale gas and electricity prices in the month prior to the update, and does not take into account the impact of longer-term hedging strategies
  • There has also been some upwards pressure as a result of increases in the expected costs of government programmes for electricity customers.

We update this chart on a quarterly basis. Click the ‘more information’ tab above for details of how to interpret the figures in the chart and for information on how the index has been calculated.

Policy Areas:

  • Electricity - retail markets
  • Gas - retail markets

Data Table

Breakdown of the year-on-year change in the Supplier Cost Index
Impact on Cost Index (Jan 2017 vs Jan 2016)
Wholesale (electricity)6
Wholesale (gas)6.6
Network (electricity)-0.5
Network (gas)-0.3
Government obligations (electricity)2.9
Government obligations (gas)-0.2

More information

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.

The cost contributions shown relate only to the direct charges to suppliers associated with the different types of costs, and do not account for the relationship 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 contributions 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 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 the retail markets to increase 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. Network charges will 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. 

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 trends in energy prices.

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At-a-glance summary: January 2017

  • The Supplier Cost Index is around 15% higher in January 2017 compared to a year earlier. The steep rise in the second half of 2016 follows a long period of falling costs between the start of 2014 and early 2016. Reductions over that period were much larger for gas than electricity. The overall index remains below its level at the start of 2014.
     
  • The recent increase is primarily because of a significant increase in wholesale gas and electricity prices for the coming 12 months. Wholesale electricity prices saw a particularly notable increase in October and November 2016, before falling back in December. This was caused by tighter forecast capacity margins in electricity generation, higher wholesale electricity prices in the French market, and higher commodity prices - particularly for coal.
     
  • 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 causes their costs to increase at a slower pace in times of rising wholesale prices, and to fall at a slower pace when wholesale prices are falling. As a result, these suppliers are likely to have been somewhat insulated from the recent wholesale price increases. For example, we expect that for a supplier that purchased its energy on a rolling basis over 18 months, the expected cost of supplying a dual fuel customer would be only slightly higher than a year earlier, and still significantly lower than two years ago.
     
  • As well as rising wholesale prices, the index has also been pushed up - although to a much lesser extent - by an increase in the expected charges to suppliers associated with government programmes, particularly those supporting renewable and low carbon electricity generation. Specifically, there have been increases in the expected costs of the Renewables Obligation scheme, and costs to suppliers associated with Contracts for Difference are also expected to rise over the next 12 months, as more of these contracts reach their start dates. Further upwards pressure has been created by the end of the £12 government electricity rebate, while the expected costs of the Energy Company Obligation have fallen.
     
  • Note that these direct costs to suppliers in relation to government programmes 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 (opens another website). Because the cost index is calculated for a fixed level of consumption, this effect is not reflected in the index.
     
  • We expect some additional upward pressure on suppliers’ costs in 2017. The index currently excludes Capacity Market payments, introduced to help secure electricity supplies, which are expected to start in October 2017. It also excludes the impact of the proposed exemption of energy intensive industries from payments for environmental programmes, expected to be introduced from April 2017. We will include these factors in future updates of the cost index.

How the Supplier Cost Index is calculated 

  • 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 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. Network charges will 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.

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

Your feedback

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.

Publications and updates

  • Published: 19th Jan 2017
  • Decisions
  • 2 Associated documents
A letter setting out our decision to launch the new Supplier Cost Index (SCI).

  • Published: 19th Jan 2017
  • Data and statistics, Guidance
  • 1 Associated documents
Supplier Cost Index (SCI): A description of the methodology used to calculate the Supplier Cost Index.

  • Published: 3rd Aug 2016
  • Closed: 14th Sep 2016
  • Consultations & responses
  • 10 Associated documents
In May 2015 we suspended our monthly Supply Market Indicator (SMI) publication to review of our approach. After consultation, we have now decided on a new Supplier Cost Index.

  • Published: 30th Apr 2015
  • Data and statistics
  • 13 Associated documents
Data published as part of our Supply Market Indicator (SMI) between March 2014 and April 2015.

  • Published: 30th Apr 2015
  • Data and statistics
  • 2 Associated documents
A methodology report explaining the approach we have taken to produce our Supply Market Indicator (SMI).

  • Published: 18th Mar 2015
  • Expected: Mar 2015
  • Closed: 22nd Apr 2015
  • News and blogs
  • 0 Associated documents
Upcoming Consultation: we are currently reviewing Typical Domestic Consumption Values (TDCVs) for gas and electricity.

  • Published: 10th Jun 2014
  • Open letters & correspondence
  • 1 Associated documents
This is our letter calling on large energy suppliers to explain the impact of falling wholesale prices on customer bills. You can view the responses received to the letter below. "Dear, Wholesale Costs

  • Published: 11th Oct 2013
  • Data and statistics
  • 0 Associated documents
This webpage details the updates we have made to our Supply Market Indicators.

  • Published: 3rd Oct 2013
  • Data and statistics
  • 0 Associated documents
As of October 2013 we have improved the presentation of our Supply Market Indicators. Instead of publishing PDFs for each weekly update, we will update the interactive graphs that appear on the main SMI webpage.

  • Published: 25th Sep 2013
  • Data and statistics
  • 1 Associated documents
For this update, the snapshot net margin is £65 and the rolling average net margin is £65.

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