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An independent UK consumer watchdog has accused the energy industry regulator of failing to act in the interests of customers by planning to allow household gas and electricity suppliers to make higher profits.
Citizens Advice said Ofgem’s plans to enable the profit margins of power providers to rise from 1.9 per cent to 2.4 per cent in October were “not properly justified or evidence-based”.
The comments add to pressure on the body, which is already facing heavy criticism for its regulation of the market after a surge in wholesale prices triggered the collapse of 30 energy suppliers in late 2021 and early 2022.
In a submission to Ofgem’s ongoing consultation on the plans, seen by the Financial Times, Citizens Advice said: “We do not believe these proposals are in the interest of consumers.
“Whilst we support ensuring financeability and market stability, these proposals are not properly justified or evidence-based, with the weight of evidence indicating a reduction in profit margin would be appropriate.”
Ofgem has argued its move to increase the profit allowance in the price cap on energy bills will help avoid a repeat of those company failures, which cost households an average of £83 each.
Introduced in 2019, the price cap limits how much energy suppliers can charge households in Britain per unit of energy. It is changed every three months to reflect wholesale costs.
Citizens Advice argued that companies’ allowed profit should be reduced instead of increased. The change would add about £10 to average annual bills in October.
Its intervention is likely to prove controversial with suppliers, many of which argue that they have been losing money for years and need more cash to invest in the changes required for Britain to meet its net zero goals.
The consumer rights lobby group argued that Ofgem had taken a “series of decisions that have reduced the risk on suppliers and generally transferred that risk on to consumers” and that relied on arguments from companies which stood to benefit.
The government stepped in last October to subsidise household energy bills following a surge in gas and electricity prices linked to Russia’s invasion of Ukraine, costing an estimated £27bn.
Suppliers’ profits have become a contentious subject of debate as the household energy market has returned to a more normal footing now that wholesale prices have eased.
British Gas said in May that it expects its profits for the first half of 2023 to be “significantly higher” than in previous years, mainly due to allowances Ofgem has made for suppliers to recoup their costs.
Meanwhile, Ofgem is under political pressure to keep costs down for consumers, with Jeremy Hunt, the chancellor, last month urging regulators to make sure that falling costs are passed on.
Under the current price cap, typical households are set to pay £2,074 over the year, compared to an average of £1,150 before April 2022.
Dhara Vyas, deputy chief executive of trade group Energy UK, said: “Most energy suppliers have been losing money over the last few years and that clearly needs to change if we’re going to have a sustainable retail sector.”
Ofgem pointed to its previous statements, which said it believes the increase in the allowance was “necessary to allow the sector to attract investment and help towards achieving improved financial resilience”.
It added that changes to the way the profit margin was calculated should also help protect consumers against price spikes.