Those vast power supply profits

Umm, but what are people complaining about here?

The big six, which include SSE and RWE, already under fire for increasing domestic bills during an economic downturn, but the latest weekly Ofgem projections show dual-fuel retail bills are now up to an average of £1,420 a year, delivering £95 in profit per customer – a profit margin for the firms of 7%.

A 7% margin? People are complaining about this when Apple makes 40%? Seriously?

As to the generation profits:

Ofgem said average margins in generation across the big six increased from 18.4% in 2010 to 24.4% in 2011.

That number looks a little odd. If it were true then half the world would be lining up to invest.

He said the wholesale margin needed to be higher given that it funded power stations and forward contracts for up to £50bn of new gas supplies. \”We believe it is a fair margin.\”

What? You mean Ofgem is publishing figures showing gross margin, before capital costs? What the wankery are they doing?

Anyone who is interested: what\’s the actual final return on these businesses? The return on capital which is the correct measure?

18 thoughts on “Those vast power supply profits”

  1. There’s no point comparing with Apple’s margins. Apple have to continually innovate, to find products and new ways of marketing them. Gas and leccy are utilities; they’re the same product as always, and the only innovation I’ve seen is that you can get Nectar points or Air Miles with some suppliers. They aren’t even responsible for the network – National Grid takes care of that.

    So is 7% a reasonable margin for a staid utility? It seems a little on the high side to me. Evidence therefore that competition in the sector is not working as intended. The standard economic solution is to improve competition through better regulation, e.g. making it easier to switch suppliers.

  2. Apple is indeed a very poor comparator. I would have thought supermarkets who are also suppliers of essential services which, horse meat aside change only slowly.

    AFAIK Tesco has a margin of around 6-7%

  3. Andrew M

    Energy generation is pretty capital intensive which does mean that you need a reasonable return on the investment for it to be sustainable

  4. Apples and Oranges !

    The perception is much akin to the oil companies: prices at the pumps go up when crude oil rises, but does not come down again (noticeably) when it drops.

    This just happens to be an example of failed competition. The energy companies do not need to create a cartel, because they have one by default.

    If it was only as simple as buying a tanker load of gas at $2 in the USA, shipping it to the UK and flogging it off of the quay at Southampton…

  5. Emil – The 7% figure relates purely to the retail side of the business, not the power generation.
    Arthur – Yes supermarkets are a better comparison, but even they are much more complex and need to be more innovative than a gas or electric billing company.

  6. 7% sounds not unreasonable, and it’s already a doddle to switch suppliers.
    If the margin is higher than supermarkets, for example, that may be due to uncertainty. I would think that the input costs and the regulatory framework are far more uncertain for power companies than for supermarkets, so a couple of percent may be the risk premium.

  7. If the return is so good buy a few shares. If not shut up. The way things are going it will soon be a high risk industry due to political uncertainty.

  8. Not profits but Milly-scums carbon tax as endorsed by Blulabour and Cameron’s wife are what will drive prices way upover the next few years. Time for a green tax strike.

  9. 7% for re-selling is ludicrous. That’s a bit high as a margin over the cost of supply, let alone as profit. Looks like it’s time to start another nPower and do the whole door-to-door sales thing again.

  10. Pingback: Wankery: Guardian UK accusing energy firms of “cold blooded profiteering” |

  11. @Dave

    and your credentials for your conclusion are?

    My experience in telcos is that 5-10% is about what you can expect for pass-through traffic with billing and bad debt risk included.

  12. Diogenes>

    They’re companies in a mature market (supposedly) doing a very simple job of sales and administration. The margin on that should be minimal. What justifies the profits being so large, in your opinion? Risk? Return on capital?

  13. If I remember correctly British gas tend to be around 4% – 5% mark. Plenty of people go on about Centrica’s profits but the two are not the same.
    Some would say that such a margin is too high, possible they are right. Profit margin on corner shop however? Almost certainly higher.
    Not keen on investing in such low percentages to make money on shares, its all right to protect capital perhaps but prefer a higher reward factor. So I don’t own shares in British Gas.

  14. John Barret: I’m sorry, the petrol price *always* follows the current cost of supply – that you don’t notice the decreases is a psychological, not an economic phenomenon. That’s why, for instance, the BBC had to recite a long legalese apology after a “Panorama” expose a couple of decades ago. Its also why oil majors are equivocal about the need to own their retail networks at all.

  15. Martin Davies>

    Profit margins on a corner shop are higher? Not once you allow for pay for the owner, reward for the risk he’s taking, and return on his capital investment, I suspect.

  16. Dave:

    I understand that the quoted margins are net profit as % of sales. In that case they do not take into account of any risk reward or return of capital investment (only depreciation and cost of debt which is (partly) used to fund capital investment) so why should we take it into account for the shop owners?

  17. Dave, self employed shop owner won’t have a wage, his income is the net profit. His staff, if he has any, will be usually on wages.
    A corner shop with profit margin of the same as British Gas had better be doing high sales total or else income will be darn low.

  18. One of the reasons that I usually don’t answer to responses is that I disappear for a while and the entire blog plus its commentators have moved on in the meantime.

    Anyway: Ricahrd Dammers

    I said “perception”. Although natural gas prices seem to be a one-way ratchet, they can go down too.

    The issue really is, that there is no actual competition in the market, because all suppliers adjust their costs within a few weeks of each other and any savings that a consumer will make are either short-term or illusory.
    It’s a bit different with buying petro,l as a tank will only last you ( for instance ) 300 miles so you can make savings by shopping around every time it’s empy. You can’t switch suppliers every time you need hot water for a bath or to cook your sausages.

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