Hiding the profits

The Big Six energy firms have been accused of misleading consumers about the reasons for their sky-high bills by glossing over the large mark-ups they charge for the electricity they generate.

Caroline Flint, Labour’s shadow Energy Secretary, has accused the companies of a lack of transparency, and of diverting attention from the much higher margins they make from their electricity generation arms:
“It’s misleading for energy companies to pretend their profit margins are only 5 per cent when that only refers to their profits on supplying energy,” she said. “Their profits on generating energy are much more substantial and are often close to 20 per cent.

Ms Knight, chief executive of the industry body Energy UK, said last Monday that profit margins of between 4 and 5 per cent were not “particularly big” and were justified when considering the investment the companies were making.

Ramsay Dunning, the general manager of Co-operative Energy, one of Britain’s biggest independent gas and electricity suppliers, goes one further, dismissing talk of profits for investment as a “red herring” and accusing Ms Knight of being “disingenuous” as the cost of investment has already been accounted for. “She is throwing mud into the water with that comment because the 4 to 5 per cent number she is using is calculated after accounting for the cost of investment,” he said. In other words, the notion that big profits are needed to help fund investment is largely irrelevant because the profit margins usually quoted by the Big Six already include investment costs.

Will Straw, an associate director of the Institute for Public Policy Research (IPPR) think-tank, said: “Why do they need to make a profit of 5 or 6 per cent when the supermarkets can make do on as little as 2 or 3 per cent? The retail profits they do make should be ploughed back.”  Although the retail arms buy their energy on the open market, much of it has been produced by their own generating divisions. It is these generating divisions that face the biggest investment costs in the coming years in the form of new power stations of all types. The Big Six can’t have it both ways,” Mr Straw said. “Either their retail and generation arms are separate, or they’re not. If they are, they should bring energy bills down because they don’t need that much profit. If they’re not, they should still bring bills down because the generating arms are making so much.”

Dieter Helm, professor of energy policy at Oxford University, said: “Why should retailing electricity attract the sort of margins that supermarkets (with all their shops, stocks and associated costs) cannot?”

Dr Robert Gross, director of the Centre of Energy and Technology at Imperial College London, said: “We need much better transparency about profits and financial flows between the retail and generation ends of the business. Because these companies are ‘vertically integrated’ [generating and selling the energy] it’s all very opaque.”