Big Six will double profits - but politics is to blame

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5 August 2014, Gas, Electricity

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The average annual UK household dual fuel energy bill is estimated at ?1,328. The biggest portion of this is the wholesale gas cost (47%). The delivery cost is the second largest portion at 24%. Social and environmental and operating costs account for 10% and 9% respectively. Finally, taxes and profits take 6% and 4% shares respectively.

Ofgem's report projects that the Big Six will increase their pre-tax profits per dual fuel customer from around ?53 to ?106 over a 12 month period. Wholesale gas prices were above ?1.10 per therm in Q1 2013 but have since fallen - from ?0.60 per therm at the beginning of 2014 to around ?0.40 per therm in August 2014.

As yet there are no known plans by the Big Six to pass the decrease on to consumers, and the reason is more complicated than the general public might believe. Firstly, the leader of the Labour Party Ed Miliband has promised to freeze energy prices for 20 months if his party wins the general election due in May 2015. If this happens, energy providers will be forced to maintain prices and suffer losses on any price increases in the wholesale gas market. Not an enticing proposition.

Secondly, energy providers do not make attractive profit margins. Currently margins are typically 4%, which is hardly exorbitant. In 2009-10 energy providers were only making ?9 per customer, a 0.7% profit margin. Reasonable profits are essential for a healthy market - it encourages new investors and enables investment into much-needed infrastructure.

Despite this calls have grown for the Competition and Markets Authority to investigate the gas market. Undoubtedly we will hear more about this in the coming months.


www.datamonitorenergy.com / asken@datamonitor.com / @DatamonitorEN

Source: MarketLine

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