Are the Big Six programmed to cut corners and raise prices to make ever more money?
Are the Big Six now programmed to cut corners and raise prices to make ever more money?
It hasn’t been a good month for the utilities, at least in public relations terms. Since May 16 Ofgem has started new disciplinary proceedings against four of the Big Six and found another guilty of offences over several years.
The practices targeted include failure to connect customers, unfair pricing, poor record keeping of Feed-In Tariff payments and impeding customer transfers to a new supplier. In the most important case, E.ON was found to have engaged in serious mis-selling to domestic customers over several years and paid a penalty of £12m.
On June 3, Tim Webb in the Times reported that the average margins made by the large suppliers on the sale of gas have doubled to 10 per cent, up from 5 per cent a year ago.
Perhaps we need to put this into context. Of the average gas bill, about 50 per cent goes to paying the wholesale supplier of the fuel, another 25 per cent goes in charges for shipping the gas over the network and for reading the meter.
Take out some money for VAT and about 20 per cent is left to cover the suppliers’ own costs and make a return. In May, fully one half of this was kept as profit. For comparison, in its most recent year Sainsbury earned a profit margin of about a third of gas suppliers. And Sainsbury has to invest many millions a year in shops and warehouses, unlike energy retailers who don’t need much new equipment. (Power stations and other assets are held in separate companies by the Big Six).
If you had some managers from the energy companies round for a meal, you’d probably like them and respect their intelligence and moral judgments. So why is it that the people in these firms appear to be behaving so badly? Are the businesses now programmed to cut corners and raise prices to make ever more money?
I think the best analogy is the middle-class family struggling to keep up appearances in the face of rapidly worsening financial circumstances. The children still have to go to expensive private schools, the car has be large and excessively powered and frequent holidays have to be taken in the warm South even as the finances crumble.
It is similar with the large energy companies. Deep down, they know their time is nearly up. The era of a small number of enormous power stations churning out ever growing amounts of electricity is almost over. Thousands of solar farms and wind turbines still only provide a small fraction of UK power, but as total energy demand continues to dip at a few percent a year the impact of renewables will grow.
As we already see in northern Europe every week, the wholesale price of power will drop to well below the level at which it is profitable to generate electricity from fossil fuels. The largest German suppliers have recognised that their days are numbered and have openly started the slow process of liquidating themselves. Their anxieties are all too visible to executives in the UK, many of whom work for the local subsidiaries of E.ON and RWE (npower).
But shareholders still need to be fed. SSE, the nearest we have to a UK-only large energy company, has raised its dividends every year since 1999. In inflation-adjusted terms, its dividend has gone up over 150 per cent and it promises increasing payments every year into the future.
Like the impecunious family facing ruin but still splurging on expensive chattels, the utilities have to deliver smoothly increasing returns in order to maintain the appearance of being in control of their finances even as their real businesses dissolve. If customers need to be gouged to deliver money to shareholders, then even the very nice people in charge of our energy companies have no hesitation deciding where their priorities lie.
Chris Goodall blogs at Carbon Commentary
 Details of all these cases can be found on the Ofgem website under the Investigations tab.
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