Energy bill freeze to hand suppliers a £1.6bn profit

energy bill freeze
energy bill freeze

The taxpayer is to fund profits of up to £1.6bn for energy suppliers this year after their earnings were protected in Liz Truss’s freeze on household bills.

Businesses will be allowed to make a margin of 1.9pc on energy that they sell to the public through the Prime Minister’s subsidy scheme, which caps the average bill at £2,500.

The cost of supplying households is expected to hit more than £80bn over the next year owing to a surge in wholesale prices.

This means that companies will be in line for a £1.6bn profit – even though the Treasury is partly responsible for footing this cost.

Rocketing gas costs over the past year have triggered a cost-of-living crisis, with average household bills climbing 54pc in April to £1,977.

They were set to increase to £3,549 in October after Ofgem, the energy regulator, raised the price cap on energy bills. The cap, introduced in 2019, changes every three months to reflect wholesale costs.

To avoid plunging households into crisis, Liz Truss stepped in last Thursday to freeze bills at £2,500 a year on average.

Under the plans, the Government will pay suppliers the difference between the lower frozen rate and what they would have charged their customers without the freeze in place.

The price cap allows suppliers to make up to 1.9pc in profits under its existing rules, meaning this margin is now being supported by a state subsidy.

Martin Young, an analyst at Investec, said that the margin would be worth about £1.6bn across the industry over the next year if the price cap stays at its current level.

Many suppliers will make a smaller profit than the margin allowed, or none at all, by running their business differently than Ofgem expects.

However, the allowance is likely to raise questions for the Government and industry at a time of vast public spending.

While many suppliers are struggling, some are backed by large, profitable parent companies, such as British Gas, a division of FTSE 100 company Centrica, and Shell Energy Retail, part of the oil and gas giant Shell.

Ofgem last month opened a review into the levels of profit margin suppliers should be able to make, amid concerns that a flat rate leads to too high profits when wholesale prices increase.

In papers released at the time, it said: “The EBIT [profit] allowance in the cap scales with customer bills… this may result in profits being unduly high in a high-price and high-cost environment.”

It came as industry leaders warned that businesses risk ruin if forced to wait longer for help on energy bills, as officials battle to offer support in a complicated market.

Companies have a wide range of energy supply contracts, with different arrangements for different industries and individual companies able to negotiate tailored deals with gas and electric providers.

The Government hopes to be able to offer support from November, but to backdate it to October to put companies on a par with households.

However this risks the demise of the most strained companies which may be unable to cope with extremely large bills next month.

Martin McTague, national chair of the Federation of Small Businesses, said “energy cost rises are a clear and present danger to small businesses. It’s hard to overstate the level of threat to small firms up and down the country in almost all industries and sectors.”

More than 30 suppliers collapsed last year after the timing of the price cap resets prevented them from immediately passing on surges in wholesale costs.

The largest, Bulb, is being bankrolled by the Government under a special administration regime that has already cost taxpayers more than £900m.

A spokesman for Energy UK said: “Most suppliers haven’t been making any money with existing profit margin and 30 went out of business last autumn”.

Ofgem’s review should take into account “whether costs are being adequately covered by current methodology”, he added.

Published by anthonyhayble

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