A new Supplier Cost Index has been revealed by Ofgem, as a replacement for the controversial Supply Market Indicator which was scrapped in 2015.
The Supply Cost index (SCI) has been introduced by the regulator to help “provide transparency around energy prices trends” and “understand what is driving their energy bills,” Ofgem’s chief executive Dermot Nolan told the press.
The SCI gives a 12 months ahead view of the cost of energy based on network charges, wholesale costs as well as social and government environmental programmes. These costs can make up around 85% of energy bills.
Data from the first indicator shows that the predicted cost of supplying the typical domestic customer on a dual fuel contract is around 15% more than the annual forecast cost in January 2016. Though, it is also around 10% less than the cost of energy in 2013.
Nolan alleged that Ofgem does not currently see an urgent need for price rises on the back of rising wholesale costs which he defined as “far from unprecedented”.
He advised larger suppliers, in particular, to offset increased costs via efficiency measures rather than passing costs on to their consumers.
The SCI does not include energy company operational costs or the costs of the smart meter rollout. Also, unlike the Supply Market Indicator (SMI), it will not predict supplier profits.
The SMI was widely critiqued by the energy industry for giving an ambiguous picture of the competitiveness in the energy market and in the midst of the Competition and Markets Authority (CMA) energy market investigation, the SMI was withdrawn. However, Nolan has firmly stated that the introduction of the SCI does not mean that Ofgem has “caved” to pressure from suppliers around the metric.
Ofgem has also pointed out that profitability information on energy suppliers will still be available through its yearly Consolidated Segmental Statements and the annual market summary it was recently asked to provide by the CMA (the first of which will be published in the second half of next year).
Power Direct Ltd.’s managing director Anne Williams had this to say:
“We use forecasting information on non-energy costs to predict forward movement in non-energy costs, these are based on changes to existing policy and use of system charges that we already know about plus estimates for the effect of inflationary prices rises.
No-one predicted Donald Trump or Brexit and wholesale costs have a similar level of predictability so wholesale cost forecasts are more like educated guesses.
And whilst Nolan says the recent price raises are not ‘unprecedented’ that isn’t the same as insignificant. If you are a business renewing a one-year contract then you will feel the effect of the increases in wholesale costs.”