By JOSHUA WARNER
On average, generating electricity has proven to be the most lucrative activity, but profits have dwindled in recent years to see a more balanced profit ratio between residential supply and power generation.
The Big Six suppliers make their profit from three core areas:
Source of Big Six profits; Source- OFGEM
However, this picture is too generalised, as each company performs very differently in each activity, with some (like EDF) deriving the majority of their earnings from generating power whilst others (like Centrica) rely more on their energy supply units.
The total value to the market of selling electricity and gas to UK households in 2016 was £28 billion, which can be compared to the value of selling energy to industrial sectors of £8.5 billion and the value of supplying energy to the commercial, transport, agricultural, public and other sectors of £13.4 billion.
However, the profitability of supplying energy varies depending on the sector being supplied.
The value of selling electricity and gas to the domestic UK market fell annually over the three years to 2016 on a per kilowatt hour basis, while the rates covering the industrial, commercial and other sectors remained fairly stable.
Average net selling value per kWh in 2016
|Pence per kWh|
|Supplying domestic electricity||14.028p|
|Supplying industrial electricity||8.07p|
|Supplying commercial and other electricity||11.635p|
|Supplying domestic gas||4.162p|
|Supplying industrial gas||1.641p|
|Supplying commercial and other gas||2.446p|
Earnings from generating energy
One of the primary reasons that each of the larger suppliers puts in such a varied performance when it comes to generating energy is because of the different fuels each of them use.
Coal, nuclear, gas and renewables are all priced differently and carry different levels of profitability, which over time can shift around, as government policy and public attitudes change.
EDF Energy generates market-leading profits from generating power to the UK mainly because of its nuclear capabilities, demonstrated by the likes of Torness atom plant in East Lothian.
However, profits have fallen over the years and Pearth-based SSE, the only other to deliver consistent profit from its operations, has caught up.
While the cost of energy for UK households often draws criticism of energy companies, the majority of domestic bills are made up of costs that suppliers have limited control over.
On average, the Big Six made just £53 worth of earnings from a domestic bill of £1,123 in 2016 – just 4.7% of the total.
There is another substantial player within this market. Drax Group operates the largest renewable power plant in the country, after converting three of its six units to burn wood pellet biomass rather than coal.
The plant feeds about 7% of the nation’s total electricity demand and represents about 17% of all renewable energy generation. It also supplies businesses in the UK through Haven Power and Opus Energy, but does not feed energy to residential customers.
Earnings from supplying energy
All of the Big Six have been shedding customer accounts over the past few years, as they cede market share.
Taking the two London-listed firms, Centrica experienced a sharp 13% decline in domestic energy account numbers over the four years to the end of 2017, losing 1.9 million customers, while SSE saw a 14% drop between March 2014 and March 2017 after losing 1.1 million customers.
The profitability of Centrica’s domestic supply arm in the UK is market leading, while EON’s profits have been steadily growing.
Meanwhile, SSE has also delivered earnings that match the consistency and reliability of its generation arm, making it the best overall performer.
Overall, there are fundamental changes occurring in the UK energy market. The price cap represents the biggest government intervention since privatisation, and regulatory pressure is likely to remain high for the foreseeable future.
Meanwhile, the industry is dealing with other changing trends, such as the move toward renewable energy which is placing more importance on distribution networks as smaller scale power plants become more common and continue to bypass the transmission network. This is also opening up growth areas like energy storage.
JOSHUA WARNER is a utilities market analyst at IG Markets in London.
14 Mar 2018