Something's not right

Jominjam126

I'm brand new to this, so apologies if you've already covered this but I just received my price quote for Gas and something simply is not right. According to Ofgem, the energy companies are "allowed" to make 1.9% profit on the gas they sell, I'm guessing this is after DD discounts are taken into account. So, back in May 2021 I got a two year fixed price of 3.23p per kWh on my Gas, through Octopus. They have just quoted me 12.61p per kWh from May 28th this year when my current contract expires. They explained the methodology as to how they come to this figure. They take the averege wholesale price for the period 17/11/22 to 17/02/23 and this sets the price for the period 01.04.23 to 30.06.23. This will then of course be reviewed quarterly. OK Fine. I check the average wholsale price for the period and I make it that the energy companies were paying 6p per kWh on average for teh period Nov 17th to Feb 17th. I use 12,500 kWh per annum, so at 12.61p per kWh to me, Octopus would make a cash margin of circa £825.00. Therefore, the cost to them to supply the gas must be coming in at getting on towards £795.00 as they are only supposed to be making 1.9% on their overall turnover of £1,576.00, ie £30.00.

I decided to look at the average wholsale price for the period January to April 2021, it was 1.75p per kWh. So how could they sell to me at 3.23p in 2021? 3.23p x usage of 12,500 kWh gives a turnover of just £405.00 and a cash margin of £185.00. That would indicate the cost to them of delivering the gas to me was in the region of £175.00 leaving them circa £10.00 profit being their 1.9% of £405.00 overall turnover.

Please understand I am taking the cost of the gas itself out of these equations right.... that's all paid for, it's not an issue. All other costs associated with delivering this gas have gone up by some 400% in just two years. Now that's what I call Music.....sorry I mean Inflation?

Am I being particularly stupid, am I missing something obvious here?

[Deleted User]

A picture saves a thousand words:

brewerdave

They are quoting you for a fix for 2 years presumably ? The OFGEM cap is expected to drop to ~ 7.5p/kwh from July 1st as far as I'm aware, so they are hedging for substantial increases over the next x months.

Jominjam126

No one is getting fixed (perhaps I should rephrase that) rates. The price is the only price they're offering. They're calling it flexi. It will change every three months, thus derisking it completely for the energy companies. It still does not explain how the cost of deliverin the gas (not the gas itself) has gone up 4 fold in 24 months, that increase theoretically sanctioned by Ofgem?

My assumption is that the govt/Ofgem are handing the energy companies a short term fix to cover the losses they probably made over the last two years. For Instance I know they would have lost circa £600.00 on the price of Gas alone on my contract these last two years! I don't mind that but I wish there were some transparency.

Jominjam126

Thanks Dolor, Wholesale at 6p selling at 12.61p is more like 48%, The main point of my post is around the "Operating Costs". These will have gone up with some wage inflation over teh last few years but I can't imagine they've climbed 400%.

QrizB

Welcome to the forum.

Please excuse the lack of quoting, im posting from my phone.

Unfortunately the published wholesale price data doesn't actually reflect the price that energy companies paid for gas. (The companies that bought on the spot market mostly went bust when prices rose.)

12.61p/kWh is the current Ofgem price cap for your region. This will be reduced to about 10.4p/kWh by the government Energy Price Guarantee, until the end of June.

From the start of July there will be a new lower Ofgem cap. The value has yet to be announced but we're expecting it to be around 7.5-8p/kWh. Your Flexible Octopus tariff will fall to match.

Jominjam126

Thanks for that QrizB but as I used the same wholesale pricing information to look at the prices I got in 2021 then I would have thought the gap remains the same? So okay, perhaps the 6p per kWh I see on the BBC is actually 7p but then surely the 1.75p I see in 2021 was more like 2p? Do you get where I'm coming from? My main issue is the Cash Profit the energy company, in this case Octopus, are making looks to me to have quadrupled. Yet Ofgem claim that the companies are only allowed to make circa 1.9% profit.....

Something's still not right!

CSI_Yorkshire

The 1.9% profit only relates to the standard variable price cap tariff.  It doesn't apply to any fix, on which suppliers are free to make whatever profit they wish.

Part of your point is correct though, if the % of profit remains the same but turnover increases, the ££ value of the profit also increases.

The exact breakdown of every component of the bill, split by region and payment method, with historic calculations going back several years, is available in spreadsheets publically accessible on the OFGEM website if you would like to see exactly how each of the particular costs has been calculated to increase (it actually includes a couple of periods prior to the introduction of the price cap just so you can see what the cap would have been at that time).

I would ask though, if you think that there should be a fixed ££ profit allowed then what would that be?  £20 no matter the size of the bill?  £100?  What about someone who uses £25,000 of electricity a year?  Should a supplier only make £20 profit on them?

debitcardmayhem

The Bbc , mail et al driving theories that they have more than likely copied from elsewhere on the web. As for oil and and gas companies, windfall taxes, did they rain bombs on Ukraine? Did they get bailed out when coronavirus hit the world. 

Jominjam126

Debit Card, not sure whether you're suggesting my theory is off whack or not (or possibly hijacked from elsewhere)? Really it is very simple but I am not the best at succinct prose!

CSI, I'll try and clarify:

in 2021 my 12,500 kWh of gas usage would have brought in £405.00 to my supplier, this paid the wholesale cost, operating cost, Network cost etc. Theoretically the leftover profit for the energy company should have been circa £8.00 as set by Ofgem.

Using the average wholsale cost at the time of 1.75p I know that the cash margin to cover everything bar the cost of gas was £185.00.

Let's say that Network Cost, Operating Cost etc have all gone up by 25% in the last two years. So, they were £177.00 back in 2021 (being the £185.00 cash margin less the £8.00 operating profit Ofgem allow). that means they are now £177.00 + 25% = £221.25.

The 12.61p per kWh now quoted brings in my supplier £1,567.25 in sales. Using the same wholesale cost reference the cost of this gas is now £749.05, leaving a cash margin of £827.20. Subtract the increased operating costs, network costs etc that would leave an operating profit of £606.00 to my supplier.

I don't mind suppliers making up for losses over rthe last two years but I would love the whole pricing structure to be less murky, ot feels somewhat covert right now.

CSI_Yorkshire

Jominjam126 said:

in 2021 my 12,500 kWh of gas usage would have brought in £405.00 to my supplier, this paid the wholesale cost, operating cost, Network cost etc. Theoretically the leftover profit for the energy company should have been circa £8.00 as set by Ofgem.

Was this on the standard variable price cap tariff?  Earlier you said you were on a fixed price.  If it was a fix, your calculation is irrelevant and likely misleading.

Jominjam126 said:

Using the average wholsale cost at the time of 1.75p 

Which is irrelevant as to the price that your supplier actually paid for your gas.  The actual wholesale prices paid by suppliers (because they are required to submit them) are used in the OFGEM spreadsheets that I told you about.

Jominjam126 said:

Let's say that Network Cost, Operating Cost etc have all gone up by 25% in the last two years.

Why are you using a random assumption when I've told you that actual figures are available?

Jominjam126 said:

The 12.61p per kWh now quoted brings in my supplier £1,567.25 in sales. Using the same wholesale cost reference the cost of this gas is now £749.05, leaving a cash margin of £827.20. Subtract the increased operating costs, network costs etc that would leave an operating profit of £606.00 to my supplier.

I don't mind suppliers making up for losses over rthe last two years but I would love the whole pricing structure to be less murky, ot feels somewhat covert right now.

Using a meaningless reference for wholesale cost that isn't comparable with your earlier numbers (if you were earlier on a fix as indicated), with invented and assumed changes in costs - this does not lead you to any relevant profit number.  You could assume anything you like and end up with whatever number you wanted to prove.  Again - the actual numbers are available in a public spreadsheet, why don't you look there?

Jominjam126 said:

I don't mind suppliers making up for losses over rthe last two years but I would love the whole pricing structure to be less murky, ot feels somewhat covert right now.

They're not.  The capped standard variable tariffs have pretty much the most transparent pricing structure of any product at this point - every part of the price is individually broken down and quantified with a full history of changes, in a published source than anyone can view.  Doesn't sound murky or covert to me.