Energy firm operating costs add £242 to every bill as expected supplier profits soar 8%

Energy firms’ operating costs are making up £242 (an average of 13%) of customers’ bills according to the second Warm This Winter Tariff Watch report. [1]

 

In an analysis of firms’ operating costs, the report reveals that energy firms may be spending almost as much on marketing, which includes sponsoring football teams, event venues and creating TV adverts (c.11% of operating costs), as they do on operating customer contact centres (c.12% of operating costs).

 

General operating costs, which go into the standing charges paid by households, also consist of central overheads, such as office rents and the cost of maintaining energy meters.

 

Ofgem allows energy firms to increase these costs with inflation (up 37.5% in six years, from £176 annually in April 2017 to £242 annually as of October 2023), however, the Tariff Watch authors argue that this approach lacks transparency. A recent report by a Committee of MPs called for operating costs to be stripped out of the standing charge altogether.

 

The report also reveals that suppliers are now expected to make an additional £140m in profit on the nation’s energy bills over the next 12 months, thanks to changes to the Ofgem price cap which came into force on 1 October.

 

The new rules mean that firms now make an average £64.70 profit per customer per year, up by £4.70 per customer. The projected 12 month profits for all energy suppliers has hit £1.88bn, an increase of £140m from the previous Warm This Winter Tariff Watch report (an 8% increase).

 

The predictions are in addition to any profits which firms have already made in 2023, which stand at a conservative estimate of £2.4bn. [2]

 

With energy prices subject to change, customers should exercise extreme caution when thinking about switching and fixing. For example, the report finds that there are now 337 fixed price tariffs that are more expensive than the current Ofgem price cap.

 

And the report also reveals an unwelcome league table highlighting the exit fees some energy firms charge for leaving a tariff early. [3]

 

Just one in twenty (6%) British Gas tariffs come with no exit fees – and the firm’s average exit fee is £62. Among the other main suppliers, 12% of EONs tariffs have no exit fees, 14% of EDF and 15% of Ovo’s tariffs are free of exit fees.  Ecotricity, Utility Warehouse, So Energy also had small proportions of their tariffs with zero exit fees.

 

On the other hand, almost all tariffs for Good Energy, Octopus and Cooperative Energy come with no exit fees. However, one smaller supplier, Ecotricity, charges the highest exit fees, averaging £150.

 

As unit costs have come down in recent months, but are expected to increase again in January 2024, the report reveals that customers could save money over the next 12 months if offered a “one year fixed” tariff with unit rates and standing charges below the current price cap. [4]

 

These rates for a direct debit customer are as the below:

  • Standing Charges: Electric 53 p/day, Gas 30 p/day

  • Unit Rates: Electric 27 p/kWh, Gas 7 p/kWh

 

However, the analysis shows there just ONE dual fuel fixed tariff currently on the market is below these levels – which itself comes with significant conditions attached. For the best variable deal, the report authors predict that the current best offer could be with two different suppliers.

 

Simon Francis, coordinator of the End Fuel Poverty Coalition, commented:

“Britain’s broken energy system continues to inflict misery on homes across the country with increased standing charges and profits hurting consumers while rewarding the energy firms.

 

“It’s galling to think that our energy bills are so high because energy firms spend as much on sponsoring Premier League football teams and expensive TV adverts as they do on customer service.

 

“But while households suffer, the Government sits on its hands and refuses to introduce tariff reforms which could bring down bills and help people stay warm this winter.

 

“Indeed with the Prime Minister halting work to improve the energy efficiency of buildings, Britain’s households will be trapped in cold damp homes for years to come.”

 

Fi Waters, spokesperson for the Warm This Winter campaign which commissioned the report, said:

“Energy firms spending £242 per customer on operating costs adds insult to injury for UK households struggling to stay warm this winter. Customers should not be subsidising fancy headquarters, entertaining and marketing when these companies are making billions. That money should be used to end energy debt and lower bills. It’s yet another example of our broken energy system which the government and energy firms seem to be in denial about.”

 

Dylan Johnson from Future Energy Associates added:

“The findings of the Tariff Watch report illustrate that Ofgem’s current methodology for adjusting operating costs is antiquated and does not align with the operational realities.  Its approach overlooks technological developments and efficiencies gained by suppliers since the last assessment in 2017, including enhanced utilisation of smart meters, digital customer service innovations and AI powered chatbots.

 

“Additionally, incrementally adjusting costs based on goods inflation is insufficient, as operational expenditures are more significantly impacted by wage inflation. This report further highlights the increased allowed profits in the new price cap as the regulators have adjusted how they calculate how much profits suppliers can have.”