Fuel suppliers now make £125 profit from every customer

The regulator said it expects profit margins to fall back next year, but said the market is still being stifled by complex tariffs, poor behaviour by suppliers and a lack of transparency in the market.

It intends to push ahead with reforms of the market, the first of which will be the introduction of a simplified standard tariff, based on a simple unit price for energy used and a standing charge, which Ofgem will set.

Ofgem said wholesale prices had risen by 40% to £115 per customer over the past year and could go even higher over the next few months. Rising wholesale prices have been cited by suppliers for the recent spate of tariff hikes.

Today's bill changes form part of a series of measures due to be unveiled by Ofgem in the next few months, including reforms of the business user market.

Measures designed to encourage easier access to the wholesale market will be published in December and proposals on how to make energy company accounts more transparent will follow in the new year.

Ofgem said the simpler bills would allow consumers to compare the differences between a standard energy supply contract and more complex deals. Customers who choose the more complex deals will also get protection against price increases for the duration of a contract, the regulator added.

Ofgem chief executive Alistair Buchanan said it had decided that a "radical break" with the past was needed.

"When consumers face energy bills at around £1,345, they must have complete confidence that this price is set by companies competing in a fully-competitive market. At the moment that is not he case", he said.

Suppliers have already started to move to address some of the regulator's concerns.

Earlier this week, Scottish & Southern Electricity announced plans to sell all of the electricity it generates on the open market, compared with the regulator's proposals that 20% of all supplies must be auctioned by 2013.

Consumer groups welcomed Ofgem's drive to simplify bills, though Consumer Focus chief executive Mike O'Connor said he awaited the response of the energy suppliers.

"Consumers are faced with a thicket of energy tariffs that can seem designed to confuse all but the most persistent and numerate consumers. More than 60 new tariffs have appeared so far this year, despite all the pressure for fewer and simpler tariffs," he said.

Which? executive director Richard Lloyd said: "This will help remove some of the complexity and confusion in the energy market that infuriates consumers. We think a simple format should be applied across all tariffs, so that people can compare the full range of energy deals at a glance."

Rising utility bills helped push consumer price inflation up to 4.5% in August and are forecast to send it close to, or even above, 5% as all of the recently-announced increases come into effect

Scottish Power was the first of the major groups to raise prices when it put gas tariffs up by 19% and its electricity charges by 10% from August 1.

Market leader British Gas increased gas bills by 18% and electricity by 16% in August, while in September Scottish and Southern Energy raised electricity by 11% and gas by 18%, along with E.ON, which increased its electricity prices by 11.4% and gas by 18.1%.

Npower raised gas prices by 15.7% and electricity by 7.2% from October 1, while price rises of 15.4% for gas and 4.5% for electricity come into effect for EDF customers on November 10.

Shadow energy secretary Caroline Flint said: "People will be shocked, if not surprised, that, at a time when millions of families are struggling with their energy bills, utility companies are enjoying soaring profits.

"With forecasts of a bitter winter looming, it's more important than ever that families are not being ripped off.

"The Government has to get a grip on energy bills. It's not good enough to tell people to shop around. We need fundamental reform of the energy market, to break the stranglehold of the big six, allowing new entrants, increasing competition and driving down energy bills for families."

SNP Westminster Energy spokesman Mike Weir demanded action from the UK Government. He said: “Energy companies should be ashamed of these margins at a time when ordinary customers are reeling from soaring bills. The energy companies say that they need to push prices up to make investments in the sector, and while that is true to some extent, an increase of more than 700% in four months cannot be justified.

“While prices soar, all the UK Government suggest is that customers shop around. But, when we have just seen the big six energy suppliers go through a 'follow my lead' of rising energy prices over the last few months, how is the average consumer supposed to know what is a good deal without knowing when the next company is going to hike prices?

“Rising fuel bills means increased VAT payments for the Treasury. This extra cash must be used to tackle fuel poverty.”

SSE responded angrily to Ofgem's calculation of net profits per customer, saying it "did not recognise in any way" the regulator's figure of £125 for a dual fuel domestic customer.

"The approach adopted by Ofgem in calculating this figure is entirely theoretical and does not reflect how a responsible energy supply business manages its energy procurement strategy in reality," it said.

The Perth-based group added that its own financial statements indicated a profit of £62 per dual fuel customer, a figure it does not expect to change significantly for the current financial year.

Industry lobby group Energy UK also criticised the Ofgem calculations. Director Christine McGourty said: "A snapshot of profits every few months does not provide a realistic picture of the average profits over a year of companies in the sector.

"As Ofgem points out in today's report, it is the rising cost of wholesale energy that has contributed to the increase in customers' bills this year."

Energy Secretary Chris Huhne is due to meet energy companies, consumer groups and the regulator on Monday in a bid to ensure that households are given help in saving money on their energy bills this winter.

Mr Huhne said he welcomed Ofgem's review proposals, which could come into force by next winter.

He added: "Both the Government and Ofgem are working to boost transparency in billing and increase competition in the energy market to help keep prices down.

"I want to give Ofgem more teeth and customers more rights, including a faster switching time and better information from suppliers."

Labour leader Ed Miliband: "I think it demonstrates why people are right to be concerned, why I've been right to be concerned.

"What you see is companies making £125 on each person's bill and even the regulator now saying that these profits are too big.

"That's why there's got to be change and that's why the Government's got to get on with it and change the way the energy market works to get a better deal for consumers.

"I'm going to keep persisting with that call and keep standing up to the vested interests wherever they are in our society and saying, actually, for businesses, for residential customers we need a better deal in energy."

With around 400 tariffs available, Ofgem said most consumers view the energy market as overly complex and hard to navigate. It hopes that by forcing suppliers to provide a standard no-frills tariff, consumers will be able to make more informed choices about their energy bills.

Here is a breakdown of its tariff reform proposals, which the regulator hopes could be implemented by next winter:

• Each supplier can only have one standard tariff per payment method, per fuel. The three payment methods are direct debit, pre-payment meter and standard credit, such as credit cards and cheques.
• Consumers will get a simple unit price and a fixed standing charge set by Ofgem - enabling them to choose the cheapest standard tariff more easily. The regulator hopes this will enable households to tell at a glance whether they can save money by switching supplier or moving to a new deal.
• All other tariffs must have a specified end date and fixed terms and conditions. With these "innovative" tariffs, there will be no restrictions on the number, type, structure or duration of fixed term contracts, including exit penalties.
• Automatic rollover at the end of the contract will be banned. Customers who do not sign up to a new deal when their fixed term contract ends will default to the standard tariff. They will also be free to switch.
• Ofgem wants all energy prices to be displayed in pounds and pence, for example '£/month' as well as 'p/kWh'. Its research shows that consumers can relate better to information presented this way. It will be the equivalent of an 'APR' comparison for gas and electricity.
• Suppliers will have to publish the price of all their tariffs in the same way so consumers can compare between standard and fixed term tariffs. This will ensure greater transparency.