The Truth About Those Rip-Off Energy Companies

John Rentoul

energy The Truth About Those Rip Off Energy CompaniesI mentioned profit margins in the energy industry in my column in The Independent on Sunday. I pointed out that margins were not high, although they had risen at the end of last year and start of this one, “from being a bit lower than those typical of supermarket companies to being a bit higher”.

This chart, courtesy of Bloomberg, shows what has happened to domestic fuel margins over the past five years. The white line is the operating profit on dual-fuel bills, which used to be around 4 per cent but which recently rose to 7 per cent. (The margins for gas and electricity billed separately are higher.)

Tesco’s operating profit margin over the past five years has averaged 5.6 per cent.

The graph disproves, incidentally, the common myth that domestic prices only ever go up when world prices go up and never down when world prices go down, as the profit margin hasn’t changed much over the past three years despite fluctuations in world prices. (Note also that dual-fuel and gas were being sold at a loss in 2008-09.)

I also said that the belief that the “big six” operate as a cartel is widely held, despite the absence of any evidence whenever Ofgem or the competition authorities have looked at the question. And despite the evidence of the food retailing industry, which has only a “big four” (Tesco, Sainsbury, Asda and Morrisons, with Marks & Spencer and Waitrose much smaller).

If the case for Ed Miliband’s price freeze policy is based on that blip in the graph in Q4 2012 and Q1 2013, he should show his working and explain why a 6.7 per cent profit margin is excessive or proof of anti-competitive behaviour.

One small point in his favour, however, is that the figures on which the graph is based are supplied to and published by Ofgem as a result of a decision Miliband made as Secretary of State for Energy and Climate Change.

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  • newfriendofed

    This is quite informative but not quite a smoking gun. For example, one can wonder whether the energy companies should have as big a profit margin as Tesco. Also, while there are only four big supermarkets and yet they are quite competitive, note that it is a lot easier for me to change from one to another than it is for me to change energy companies. In fact, it is too easy for me to change supermarkets as there are now so many branches of each that I barely need to move to change from one to another.

  • greggf

    It would be interesting to see the chart prior to 2008 when the effects (on margins) of the sharp fall in Sterling against the USD should be more evident. The variations in margins of dual fuel and gas around 2008 do indicate a price sensitivity to this fall, where importing newly expensive oil and gas has affected them.
    Since then the “big six” have been rebuilding their margins, and which may explain the consumer perception of excessive pricing.

  • Perry525

    This article completely ignores the fact that, companies like BG have vertical integration and the domestic sales side is buying from BG wholesale side,(at whatever price they care to name) who in turn buy from BG transport. The fact is BG buy from wherever they can and they only sell to the UK when they cannot get higher prices elsewhere in the world. Therefore, the wholesale price is merely a concoction, a price of justification.

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