Before privatisation, it used to be simple: British Gas supplied gas while electricity came from the regional electricity boards. But whereas greater competition should have forced prices down, it is now dominated by half a dozen major players. And the way they are behaving has many of the characteristics of a price-fixing cartel — though, of course, it can’t be because that would be illegal. The fact they each make average profits of about £125 per customer is just a coincidence.
I think the figure is actually £125 gross profit per customer, isn\’t it? As per the Ofgem report?
There are 25 millionish households, so assume that many accounts. So at £125 per account profit we\’d be expecting £31 billion in profits a year from those big six companies. Don\’t forget, this is entirely ignoring any industrial or commercial supplies.
Not all are listed but one of them is Centrica and they make £1.9 billion a year. Scottish and Southern £1.2 billion.
So if one third of the industry is making £3 billion a year in profits we might expect (I know, very rough) the industry as a whole to be making £9 billion.
And this number will include any profit from industrial and or commercial supplies as well as domestic. Let\’s purely on the back of a fag packet basis, say that domestic is 50% of the business. £4.5 billion profit made out of it then, with 25 million households, looks like profit is more like £18 an account then.
Now, yes, I know, all very sketchy, but I think we have shown that it just ain\’t true that the energy companies are making £125 per customer in profit, are they?
It\’s another one of those political statistics. Report comes out saying £125 blah blink and you\’ll miss it qualifications profit and everyone leaps about saying £125 profit leaving out the blah blink and you\’ll miss it qualifications.
Job done, hugely misleading number now fixed in the public memory.
Turning to the Ofgem report, we find that:
It provides an indicator of the margin earned for supplying energy to a typical standard tariff customer, rather than an estimate of energy supply company profits.
OK, as I said, they\’re not measuring net profit.
The area between the customer bill and the combined wholesale and other costs lines represents gross margin. Subtracting operating costs from the gross margin gives the net margin, represented by the green line. Operating costs include: staff costs, IT costs and overheads. They also include discretionary elements (such as sales and marketing costs) and bad debt costs. These costs were updated as part of our Retail Market Review work.
Oh. It looks like they\’ve left out capital costs there then. Which, in a capital heavy industry like gas and \’leccie gives us our really very misleading figures, doesn\’t it?
Aha! Update: and of course in the comments I see where my error is. £100 per household is £2.5 billion with 25 million households.
Oh dear, egg on face or what? Blog after the coffee, not before, eh?