How are energy prices set?
In Britain’s energy market, suppliers compete on price and service to win customers. Suppliers face a number of different costs in supplying gas and electricity. In the price they charge consumers they will seek to cover these costs and achieve a surplus. This is their pre-tax margin, out of which they make their profit.
The only part of the energy bill that we directly regulate is that part associated with running the energy transportation networks – the pipes and wires that deliver gas and electricity to consumers. We regulate the revenues of network companies because these are monopoly businesses, and so not subject to competition. We allow these companies appropriate funding to invest in and run their networks while delivering value for money for consumers.
The profit that suppliers make is not an entitlement. Instead, suppliers need to earn it through the service they offer and how efficiently they manage their costs.
What was the Supply Market Indicator?
To improve transparency around what is driving how much consumers pay for their energy, we publish regular information on trends in suppliers’ costs and profits. Historically, this has comprised both analysis of suppliers’ realised costs as reported in their financial statements, and our supply market indicator (or SMI).
The SMI was our 12-month forward look at cost trends. It used information on wholesale prices, network charges and the charges associated with government obligations to estimate the annual cost per customer faced by a typical large supplier to deliver gas and electricity. It also included an estimate of an average bill, and used this to derive an estimate of a typical large supplier’s pre-tax margin for the next 12 months.
You can find out how the SMI was estimated in our Methodology for the Supply Market Indicator. Links to historic charts produced as part of the SMI are available in the publications and updates list below.
In May 2015 we suspended our monthly SMI publication to carry out a review of our approach. Following this review, we have now published a consultation on how the SMI should be replaced. We are seeking your views on the proposal described in that document, before making a decision on how to replace the SMI later this year.