Questions over accuracy of Ofgem’s figures

Independent research from NERA has found Ofgem estimates have been consistently inaccurate since 2011 and by as much as 200%. This is despite Ofgem’s attempts to rectify the way they calculate their figures to make them more accurate.

The figures at the heart of the dispute are the Supply Market Indicators (SMI) which represent a monthly estimate of costs and revenues for a typical large energy supplier over the coming 12 months.

The BBC have reported the story with the headline Energy firm profit margins to rise, forecasts regulator…a headline that maintains the usual energy bashing in the media.

The NERA report highlights that the SMI:

  • consistently overstated profits;
  • is statistically biased – resulting from mistaken assumptions around revenues and costs;
  • overestimates average consumption levels; and
  • used outdated and hypothetical information to calculate hedging strategies.

Commenting on NERA’s assessment of flaws in the regulator’s own model Lawrence Slade, chief executive of Energy UK, said:

“NERA’s research shows that Ofgem’s SMI reports, time and again, have proven to be unreliable. The report shows that the SMI takes no account of what energy companies have to pay out in financing costs, interest or tax but gives the misleading impression that there are massive profits to be made. Ofgem’s Dermot Nolan admitted the SMI was no predictor of future profits but Ofgem still risks misleading customers by publishing these inaccurate figures every month. It’s high time the SMI was abandoned.”

Mr Slade said that the energy industry is committed to working with Ofgem and to greater transparency with customers based on rigorous and accurate information. He pointed out that all the major companies annually publish full breakdowns of earnings and costs in their Consolidated Segmental Statements (CSS). These are audited by Ofgem which has acknowledged they are a better indicator of earnings before interest and tax as they are based on actual historical data.

Sadly most of the media won’t delve quite this far.