Big Six energy profits rocket skywards by 43% last year

ofgemAverage profit per household for the Big Six energy companies rocketed upwards by 43% last year compared to 2011.

And, also according to official figures from OFGEM – the UK gas and electricity markets regulator – average household energy bills increased by 17% over the same period.

Ofgem required the large energy companies to publish statements for 2012 showing separately the revenues, costs and profits of their generation and supply businesses.

In a detailed 32-page report analysing both the costs and profits of electricity generation and gas and electricity supply of the Big Six Utilities (BSU) – comprising Centrica (which trades as British Gas and Scottish Gas), E.ON, EDF, RWE Npower, Scottish Power and Scottish & Southern Energy – OFGEM concluded (as shown in the table below) that;

  •  Household customers of the large energy companies paid on average £1,174 for their electricity and gas in 2012. That is £167 more than in 2011, or a 17% increase.
  •  At the same time, average Big Six utilities’ operating profit per household rose by 43% – from £30 to £53.

 

£/customer/year             2009               2010               2011           2012

 Average bill                    £1,043          £1,063          £1,006          £1,174

Wholesale costs              £646            £588             £537             £612

Other costs                      £265            £288             £294             £354

Supplier costs                  £123            £152             £146             £154

OPERATING PROFIT       £8                £35                £30              £53

 

The report also show that total profits fell by £133m, or 3.4%, on the previous year. This was a result of generation profits falling more than supply profits rose. Profits increased in the domestic supply market, providing an average profit margin of 4.3%.

The OFGEM report adds; “The fall in generation profits (by £484m or 18%) was largely the result of higher depreciation and amortisation charges rather than movements in fuel costs or market prices. Profit levels before these charges are taken into account were very similar to those earned in 2011.

“However, lower generation profits were partly offset by a rise in overall supply profits (by £351m or 28%). This was mainly due to strong profit growth in the domestic supply market (by £509m or 75%). This resulted in part from higher household consumption (due to cold weather) and higher prices.”

 An OFGEM spokesman added; “Our Retail Market Review analysis has shown that competition is not working as well as it could. There is not enough competitive pressure on the large energy suppliers.

“To tackle this, we have implemented a significant package of reforms to make the retail market simpler, clearer and fairer. We are also pushing ahead with changes to open up the wholesale electricity market. Our aim is to make it easier for existing independent suppliers and new entrants to compete effectively with the large suppliers.

“To improve transparency and help rebuild confidence in the energy market, we want to continue improving the usefulness and accessibility of companies’ statements and our own summary document. To that end, we are consulting on ways the statements could be improved and on other steps that could be taken to improve transparency.

“That consultation closes on 6 December. We welcome feedback on this document and encourage participation in the consultation.

“We are currently undertaking an assessment of the state of the retail market. This will look at a range of indicators of how well the market is working in the interests of consumers, including profits. We will publish our findings in March 2014.”

Responding to Ofgem’s energy suppliers profits announcement, Audrey Gallacher, Director of Energy, Consumer Futures, said: “Consumers do not know whether they can believe the relationship between energy prices, company profits and the wholesale price of energy.

“Greater transparency is vital to establish whether consumers are paying a fair price.

“While we welcome Ofgem’s initiative to improve information on energy supplier profits, the data relates to last year and does not incorporate any changes to costs or profits this year. It is a snapshot of the past, not the present, and does not show what margins are being made currently.”

A spokesman for Energy UK – the trade association whose members include the Big Six Utilities – said that while OFGEM’s report report sets out the earnings before tax paid for supply side and for generation, “these figures do not take into account the costs of the huge investment the energy companies are making, the interest or the tax they are paying. These are not net profit figures.

“Ofgem supports what the companies have been saying. The main reasons customers have seen their household bills go up is because the cost of gas and electricity have gone up as well as other add-ons – such as the social and environmental policies – rising fast.

“Earnings from generation pays for major investment the industry is making. The generation figure of earnings before interest and tax of 20% is not, as Ofgem acknowledges,”a meaningful measure of profitability.

“Energy UK is therefore asking Ofgem to use the much more meaningful figures of cost of capital. The industry is committed to transparency and openness.  We ask others to use clear explanations that cannot be easily misunderstood.”

 

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed