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Profit margins at big six energy firms hit highest level on record

The Guardian/31 August 2017

Profit margins at the big six energy providers have hit the highest level on record, according to the regulator, Ofgem, in data that comes just weeks after British Gas raised some prices by 12.5%.

The Ofgem data reveals that the average pre-tax margin among the major power companies rose to 4.48% in 2016, up from 4.15% the year before and just 0.89% in 2009, when the regulator began collecting figures.

The data was first released in July but Ofgem has only been able to present a complete picture now after the inclusion of figures from all of the big six.

Centrica, which owns British Gas, enjoyed consistently the highest margins, running at 7.18% in 2016. SSE and E.ON were the second most profitable, both on a margin of 6.95%.

Centrica provoked uproar this month when it raised prices for 3 million customers, which the chief executive of its consumer business, Mark Hodges, blamed on “an underlying increase in policy and transmission costs”.

The Ofgem data throws doubt on the persistent complaints by the energy companies about shouldering a worsening burden of environmental costs.

The figures show that the cost of environmental and social obligations on the energy companies fell from £109 in the typical dual-fuel bill in 2009 to just £86 in 2015, with a small rise to £91 last year.

Centrica said, while wholesale costs have decreased, they have been offset by rising network and transmission costs, including the rollout of smart meters, and that government mandates and policy costs now represent the most significant part of electricity bills. It added that on a post-tax basis, its profit in 2016 was equal to £52 on the average dual fuel bill of £1,112.

However an earlier analysis of energy company profits by Lazarus Research, looking at all the big six providers except SSE, found that gross margins had expanded from 20.7% to 22.6%, a fourth consecutive annual increase. It singled out gas supply as “particularly profitable”, adding that the figures “highlight why the sector is in the political spotlight”.

The figures are likely to provoke fresh controversy regarding overcharging of consumers. An investigation into the energy market by the Competition and Markets Authority concluded last year that the big six suppliers were overcharging by £1.4bn annually.

During the election campaign, Theresa May pledged to cap bills for 17 million families on the worst-value energy tariffs, but the plan was missing from the Queen’s speech – to the delight of big energy companies.

Instead, the business secretary, Greg Clark, told Ofgem to safeguard “customers on the poorest value tariff”, with policy expected to focus on extending an existing ceiling on bills for 4m households on prepayment meters to a further 2.6 million vulnerable customers.

Ofgem said consumers are also increasingly switching suppliers to find better deals. In the month of June 2017, the number of electricity switches reached 380,000, their highest level since June 2011, while gas switching was at its highest since June 2009.

An Ofgem spokesperson said: “In a competitive market, we expect suppliers to drive down costs and the prices they charge their customers; if they don’t, their customers will switch to rivals who do.” They said the latest data showed the number of customers on standard variable deals had fallen by almost 1 million over the past six months as more people switched.

They added: “We want many more customers who remain on standard variable tariffs in particular to get a better deal and are stepping up our efforts to make sure that competition works for everyone, whilst also putting in place protections for the vulnerable.”


News Source: The Guardian

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