Energy suppliers limited to 2% profit

wrf12345

If you were told you could only make 2 percent profit on turnover or earnings then guess what you would do - put your prices up to increase turnover so that the 2 percent in actual cash gets bigger. Guess what has happened... more Ofgem incompetence and absolutely no incentive to run efficient companies.

vic_sf49

Thanks. I used a screenshot from the first link by @MattMattMattUK, as that had the figure I wanted to quote; the 1.9% in this case.

I explained to the person ref the energy producers vs suppliers, but they clearly just wanted to rant about "energy companies making huge profits", and in response to the 1.9% "oh, well, the shareholders are making loads then".

So thanks for the further comments, and that first link of yours @Chrysalis was something I think all energy suppliers should use on their websites. A very handy guide for those unsure about how it all works.

I do find navigating the Ofgem website a bit of a trial. You all seem to find these useful documents, whereas I can either find very recent things, or get thousands and thousands of meaningless sounding report titles, hence me staring this thread. 

I could investigate further, but also ugh. I shall continue reading this forum instead. 

[Deleted User]

wrf12345 said:

If you were told you could only make 2 percent profit on turnover or earnings then guess what you would do - put your prices up to increase turnover so that the 2 percent in actual cash gets bigger. Guess what has happened... more Ofgem incompetence and absolutely no incentive to run efficient companies.

If you recall, the Ofgem Cap was brought in as a political decision to ensure that customers on a supplier's Standard Variable Tariff (SVT) were protected. The Government was also minded to bring in mandatory switching to a fixed tariff for customers on a SVT who were resistant to switching tariffs.

The energy crisis changed everything. When prices increased, the Ofgem Cap become an energy price ceiling as suppliers could no longer afford to offer cheaper fixed price tariffs. The 6 monthly Cap resulted in a large number of suppliers being forced to sell energy at a cost lower than they could buy it for: as a result, many went bust.

Ofgem has since changed the Cap review from twice a year to 4 times a year, and it has allowed some backwarding of unforeseen costs to be built into the Cap. Given that since October last year, the Government has had to support every supplier by covering the cost difference between the capped average charge and the actual price of energy, I struggle to see how you can conclude that suppliers have put up their prices to increase turnover.

Fixed tariffs will return when the actual cost of forward priced energy falls below the Cap.

The alternative to the Cap was to allow market forces to prevail. If this had happened 18 months ago then fewer energy suppliers would have gone to the wall. History will show whether the subsequent cost of supplier failures will prove to be higher than what we would have paid had energy prices been allowed to rise 18 months ago.

Given that Octopus Energy is now primarily a technology company that sells, inter alia, energy and one which is making increasing use of AI in support of customers how would you make it more efficient? 



 

MattMattMattUK

wrf12345 said:

If you were told you could only make 2 percent profit on turnover or earnings then guess what you would do - put your prices up to increase turnover so that the 2 percent in actual cash gets bigger. Guess what has happened... more Ofgem incompetence and absolutely no incentive to run efficient companies.

The energy suppliers cannot push costs up, all costs that they can charge have fixed maximums, from profit to wholesale rate. 

It is always wise to educate oneself before commenting.

Chrysalis

vic_sf49 said:

Thanks. I used a screenshot from the first link by @MattMattMattUK, as that had the figure I wanted to quote; the 1.9% in this case.

I explained to the person ref the energy producers vs suppliers, but they clearly just wanted to rant about "energy companies making huge profits", and in response to the 1.9% "oh, well, the shareholders are making loads then".

So thanks for the further comments, and that first link of yours @Chrysalis was something I think all energy suppliers should use on their websites. A very handy guide for those unsure about how it all works.

I do find navigating the Ofgem website a bit of a trial. You all seem to find these useful documents, whereas I can either find very recent things, or get thousands and thousands of meaningless sounding report titles, hence me staring this thread. 

I could investigate further, but also ugh. I shall continue reading this forum instead. 

I only find the good stuff either via links people provide or google, actually finding it via navigating their site I feel is impossible, as if they dont want us to find the stuff.

CSI_Yorkshire

Chrysalis said:

vic_sf49 said:

Thanks. I used a screenshot from the first link by @MattMattMattUK, as that had the figure I wanted to quote; the 1.9% in this case.

I explained to the person ref the energy producers vs suppliers, but they clearly just wanted to rant about "energy companies making huge profits", and in response to the 1.9% "oh, well, the shareholders are making loads then".

So thanks for the further comments, and that first link of yours @Chrysalis was something I think all energy suppliers should use on their websites. A very handy guide for those unsure about how it all works.

I do find navigating the Ofgem website a bit of a trial. You all seem to find these useful documents, whereas I can either find very recent things, or get thousands and thousands of meaningless sounding report titles, hence me staring this thread. 

I could investigate further, but also ugh. I shall continue reading this forum instead. 

I only find the good stuff either via links people provide or google, actually finding it via navigating their site I feel is impossible, as if they dont want us to find the stuff.

OFGEM make it easy to find the information that they think should be public facing, but anything regulatory/detailed/nackground that they have been told should be available to the public beeds a bit of experience with the site and systems.

vic_sf49

CSI_Yorkshire said:

Chrysalis said:

vic_sf49 said:

Thanks. I used a screenshot from the first link by @MattMattMattUK, as that had the figure I wanted to quote; the 1.9% in this case.

I explained to the person ref the energy producers vs suppliers, but they clearly just wanted to rant about "energy companies making huge profits", and in response to the 1.9% "oh, well, the shareholders are making loads then".

So thanks for the further comments, and that first link of yours @Chrysalis was something I think all energy suppliers should use on their websites. A very handy guide for those unsure about how it all works.

I do find navigating the Ofgem website a bit of a trial. You all seem to find these useful documents, whereas I can either find very recent things, or get thousands and thousands of meaningless sounding report titles, hence me staring this thread. 

I could investigate further, but also ugh. I shall continue reading this forum instead. 

I only find the good stuff either via links people provide or google, actually finding it via navigating their site I feel is impossible, as if they dont want us to find the stuff.

OFGEM make it easy to find the information that they think should be public facing, but anything regulatory/detailed/nackground that they have been told should be available to the public beeds a bit of experience with the site and systems.

Glad it's not just me. But the time you've read the title of their third or fourth report after a search, you're asleep at the keyboard. 

[Deleted User]

Ofgem is now proposing to increase the supplier profit to 2.4% from October. It argues that this should prevent future supplier failures. To me, this is a bit of a circular argument. 

Suppliers failed because of a lack of financial oversight by Ofgem ( and the cap that forced many to sell on at a loss). SoLR costs to date average £83 per consumer so Ofgem argues that it is better for us to pay an extra £10 per year to reduce the possibility of future supplier failures.

The cynic in me thinks that Ofgem knows that it doesn’t have the resources to oversee suppliers so it wants to reduce the future potential supplier failure rate to protect its own reputation. As always, it expects the consumer to pay for its regulatory failings. I shall now put my Cynic Hat back in its box.

Mstty

I don't mind them making 5% profit it makes sense and then does give some of them companies (Octopus) the ability to play around more with beta tariffs. Some will just pocket it but most wil see what Octopus are doing and replicate their business model or continue to lose customer base.

MattMattMattUK

[Deleted User] said:

Ofgem is now proposing to increase the supplier profit to 2.4% from October. It argues that this should prevent future supplier failures. To me, this is a bit of a circular argument. 

2.4% is still an incredibly low rate of return, the return on capital would be higher just leaving money in a bank account. FTSE averages around 4.5% pa but there is also asset growth involved in that as well which is often another 4-6% and in a good year can easily be 10% (yes I know it can also go down). 

[Deleted User] said:

Suppliers failed because of a lack of financial oversight by Ofgem ( and the cap that forced many to sell on at a loss). SoLR costs to date average £83 per consumer so Ofgem argues that it is better for us to pay an extra £10 per year to reduce the possibility of future supplier failures.

Suppliers failed because global energy prices went through the roof due to Russia invading Ukraine, combined with the price cap. No business is going to plan financially on the basis that the regulator in their industry will force them to sell their product less than 50% of cost for more than a year. No amount of financial oversight would have resolved that because even the best regulated industry will not be required to hold 50%+ of annual turnover as cash reserves.

[Deleted User] said:

The cynic in me thinks that Ofgem knows that it doesn’t have the resources to oversee suppliers so it wants to reduce the future potential supplier failure rate to protect its own reputation. As always, it expects the consumer to pay for its regulatory failings. I shall now put my Cynic Hat back in its box.

The rationalist in me thinks that it is because Ofgem recognises that 1.8%/2.0% profit is unsustainable in the long term, even 2.4% is incredibly poor. In a sector that is restricted as energy is, where profit is capped, where debt recover is in many cases blocked, where suppliers are banned from stopping customers in debt running up further debt and where social costs are foisted onto customers of those companies whilst the government expects the businesses to administer those schemes for free there has to be at least some acceptance of the realities of the world we live in from the regulator.