UK Energy Market Regulator To Allow Suppliers To Boost Profit Margins

After dozens of UK energy firms went bankrupt during the energy crisis, Britain’s energy market regulator on Thursday proposed amendments to the profit margins companies are allowed to make, which could boost margins by 27%.  

The UK has a so-called Energy Price Cap in place, which protects households from excessively high bills by capping the price that providers can pass on to them, but which additionally burdens energy providers.

According to the consultation proposed on Thursday by the regulator Ofgem, a hybrid allowance is proposed for the Earnings Before Interest and Tax (EBIT) allowance in the default tariff cap. This hybrid allowance will include a fixed and a variable component based on a revised assessment of the capital employed and cost of capital because the energy market has changed significantly since the margin allowance was initially set in 2018.

Under the proposal, the money energy firms can make would be set at an indicative EBIT allowance of £47 per customer, compared with a £37 per customer margin allowance under Ofgem’s current approach.

The proposal has an open period for comments and responses by June 28, 2023.

Subject to the consultation, the planned implementation of changes would take effect in October 2023, Ofgem said today.

The allowance for higher profit margins would be welcome news for energy suppliers in the UK, which have struggled since the start of the energy crisis due to the surge in commodity prices at the end of 2021 and last year, especially of natural gas.

More than a dozen power suppliers in the UK exited the retail energy market in the autumn of 2021 and early 2022.

Also today, Ofgem said that the energy price cap from July 1 to September 30 would be set at an annual level of $2,566 (£2,074) for a dual fuel household paying by direct debit based on typical consumption. The new cap is down by around $618 (£500) compared to current levels due to the recent decline in wholesale energy prices.

By Charles Kennedy for Oilprice.com

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