Ofgem admits sustained upward pressure on supply costs will affect all energy companies

The estimated annual cost of supplying energy to consumers has increased by 3 per cent over the first three months of 2017, according to Ofgem’s Supplier Cost Index (SCI).

The index was introduced in January of this year. It is designed to replace the unpopular Supply Market Indicator which was scrapped by Ofgem during the Competition and Markets Authority inquiry into the energy market.

The new index tracks the contribution of network charges, government obligations and the wholesale cost of electricity and gas to the total energy supply cost base.

According to the latest index figures, released today, the annual costs of supply energy to domestic consumers in the UK has risen by three per cent on January. This increase is primarily due to big increases in the wholesale costs of both electricity and gas, however three percentage points within the increase are due to rising costs from government obligations.

Compared to February last year, the expected annual cost of energy supply to retailers has risen by 18 per cent, according to the index. However, compared to the index baseline of January 2014, supply costs have still fallen by around six per cent.

Over the course of the last month, a range of suppliers have raised the cost of their standard variable tariffs, citing upwards pressure in their cost-bases.

Most recently, Eon announced that its standard variable dual fuel tariff will increase by 8.8 per cent from 26 April. It blamed the action largely on costs arising from government social and environmental schemes.

On announcing the new index figures, an Ofgem spokesperson said: “In the past few weeks, suppliers have responded to increasing cost pressures by announcing price freezes as well as price increases of different levels.

“This shows that competition is beginning to have an impact, with some suppliers competing more effectively than others to keep their prices and costs down. With switching at its highest rate for six years, suppliers who don’t bear down on costs effectively risk losing customers to cheaper rivals.”

In January, Ofgem told national and sector media that a15 per cent year-on-year increase in the SCI did not provide justification for passing costs onto consumers.

With this new update however, the regulator’s spokesperson conceded: “Today’s update, which covers the period up to 1 February, shows that costs have continued to increase in 2017 particularly as a result of rising wholesale prices. If costs increases are sustained, even suppliers who bought energy in advance when prices were cheaper will be affected.”

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