Energy suppliers limited to 2% profit

vic_sf49

I'm trying to explain to someone that it's the energy producers that make big profits, whereas suppliers are limited to a 2% profit, or so I keep reading from the knowledgeable folk on here. 

Who set the 2%? OFGEM?

And does anyone have a handy link to those facts please. 

I'm clearly failing at searching the Internet today. 

MattMattMattUK

vic_sf49 said:

I'm trying to explain to someone that it's the energy producers that make big profits, whereas suppliers are limited to a 2% profit, or so I keep reading from the knowledgeable folk on here. 

Who set the 2%? OFGEM?

Ofgem set the amount, after consultation with the suppliers and government, nominally it sits between 1.8% and 2% depending on a few variables. In theory there are some ways to make slightly more, by potentially making savings on things which have a specified cost, such as customer service, but they can also be fined for falling below certain customer service targets, so it is a narrow path to walk.

vic_sf49 said:

And does anyone have a handy link to those facts please. 

I'm clearly failing at searching the Internet today. 

https://www.ofgem.gov.uk/publications/ofgem-confirms-changes-price-cap-methodology-and-frequency-ahead-new-rate-be-announced-later-month

There is a link stating the 1.9% for Q4 2022. You will not find it generally stated in such plain terms, it is often tied up in part of the overall price for the price cap methodology. 

[Deleted User]

vic_sf49 said:

I'm trying to explain to someone that it's the energy producers that make big profits, whereas suppliers are limited to a 2% profit, or so I keep reading from the knowledgeable folk on here. 

Who set the 2%? OFGEM?

And does anyone have a handy link to those facts please. 

I'm clearly failing at searching the Internet today. 

The fact that some suppliers are in the same Group as generators doesn’t make things easy. For example, Shell Energy makes huge profits globally but Shell Energy Retail UK is making a loss and it is likely to be sold sometime this year. A £96M loss in 2021 and £121M loss in the previous year.

The 2% profit only applies to the Ofgem Cap - the SVT if you like. Historically, fixed tariffs have been set at a lower price than the Cap. If a supplier is able to offer a lower fixed price tariff then it can set its own profit margin.

Mstty

Companies such as Octopus using their own Kraken software have publicly stated it saves them 50% of operating costs. 

So there are some instances where companies are streamlined and not old big dinosaurs like the historical big 6 where they make the 1.8-2% profits allowed in the price cap plus the savings they can make internally on operating costs

Taking the April 2023 price cap breakdown below



In the instance of Octopus's own announcement of operating cost savings they make £130 per customer plus 1.8-2%

bristolleedsfan

Mstty said:

Companies such as Octopus using their own Kraken software have publicly stated it saves them 50% of operating costs. 

So there are some instances where companies are streamlined and not old big dinosaurs like the historical big 6 where they make the 1.8-2% profits allowed in the price cap plus the savings they can make internally on operating costs

Taking the April 2023 price cap breakdown below



In the instance of Octopus's own announcement of operating cost savings they make £130 per customer plus 1.8-2%

Just wondering whether if you had been messaging Octopus Chief prior to June 2022 you would have started this thread


https://forums.moneysavingexpert.com/discussion/6364946/octopus-have-they-let-down-their-solr-customers/p1

"There has been no decent fixed rate to choose, nothing for months despite other lucky people moved to EDF, BG, EON etc have been awash with various good rate deals to see them through the winter and the upcoming price rises"

BUFF

Mstty said:

Companies such as Octopus using their own Kraken software have publicly stated it saves them 50% of operating costs. 

So there are some instances where companies are streamlined and not old big dinosaurs like the historical big 6 where they make the 1.8-2% profits allowed in the price cap plus the savings they can make internally on operating costs

Taking the April 2023 price cap breakdown below



In the instance of Octopus's own announcement of operating cost savings they make £130 per customer plus 1.8-2%

Except they don't, they are still running at a loss. In financial year 21-22 they had a £161 million operating loss on a turnover of more than £4 billion. 

Mstty

BUFF said:

Mstty said:

Companies such as Octopus using their own Kraken software have publicly stated it saves them 50% of operating costs. 

So there are some instances where companies are streamlined and not old big dinosaurs like the historical big 6 where they make the 1.8-2% profits allowed in the price cap plus the savings they can make internally on operating costs

Taking the April 2023 price cap breakdown below



In the instance of Octopus's own announcement of operating cost savings they make £130 per customer plus 1.8-2%

Except they don't, they are still running at a loss. In financial year 21-22 they had a £161 million operating loss on a turnover of more than £4 billion. 

That's not made up they may have made a loss but they have stated they have saved 50% of operating costs with kraken.

What they have done is some nice loss leading beta tariffs of course and other things.

I won't go down the route of explaining why companies post losses especially when they are expanding as fast as Octopus, the charges for new customers joining them force upon them by Ofgem and other factors. I think you have been here long enough to add those up yourself👍

Mstty

https://www.bcg.com/publications/2020/interview-with-octopus-energy-jon-paull-on-cutting-edge-customer-service

https://octopus.energy/blog/built-to-last/

vic_sf49

Thank you everyone.

Think I need a clearer head to look at that document @MattMattMattUK

Good to know that it only applies to the SVR @[Deleted User].

Gonna fish the laptop out, and have a look at it all in more detail tomorrow, especially the graphics @Mstty.

Feel free to continue adding to the thread, but I might not jump back into the conversation. 

BUFF

Mstty said:

BUFF said:

Mstty said:

Companies such as Octopus using their own Kraken software have publicly stated it saves them 50% of operating costs. 

So there are some instances where companies are streamlined and not old big dinosaurs like the historical big 6 where they make the 1.8-2% profits allowed in the price cap plus the savings they can make internally on operating costs

Taking the April 2023 price cap breakdown below



In the instance of Octopus's own announcement of operating cost savings they make £130 per customer plus 1.8-2%

Except they don't, they are still running at a loss. In financial year 21-22 they had a £161 million operating loss on a turnover of more than £4 billion. 

That's not made up they may have made a loss but they have stated they have saved 50% of operating costs with kraken.

What they have done is some nice loss leading beta tariffs of course and other things.

I won't go down the route of explaining why companies post losses especially when they are expanding as fast as Octopus, the charges for new customers joining them force upon them by Ofgem and other factors. I think you have been here long enough to add those up yourself👍

I have also been a Managing Director, albeit of a company with much, much smaller turnover. I still think that they will be lucky to ever actually hit the % profit that they are allowed on retail SVR supply (business contract profits are not constrained either).

On the other hand the part of the group that develops/licences Kraken has an extremely healthy profit margin.

Chrysalis

vic_sf49 said:

I'm trying to explain to someone that it's the energy producers that make big profits, whereas suppliers are limited to a 2% profit, or so I keep reading from the knowledgeable folk on here. 

Who set the 2%? OFGEM?

And does anyone have a handy link to those facts please. 

I'm clearly failing at searching the Internet today. 

They are capped on profit but only on SVR tariffs, and there is a buffer above that for cost inefficiencies.  In many cases the suppliers are also owned by these wholesalers, so its not cut and dry and I think both arguments have validity.

There is a ofgem link I posted a couple of days ago here.

https://www.ofgem.gov.uk/sites/default/files/docs/2020/07/ofg1102_price_caps_explained_easyread.pdf

and a simpler one here.

https://www.ofgem.gov.uk/information-consumers/energy-advice-households/check-if-energy-price-cap-affects-you