Centrica results attract criticism again but there is a bigger picture

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4 March 2013, Gas, Electricity

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Energy prices are a hot political issue, with the average UK family paying about GBP1,400 per year for a dual gas/electricity deal (the British Gas average is about GBP1,300 per year). According to data from Ofgem the net margin on the GBP1,400 dual fuel deal is about GBP115 (8%), which is hardly excessive. Looking at other services that are essential in modern Britain we see that the net margin earned last year by Tesco (mainly food but also clothing) was 4.3%, while motor fuel retailers make about 8%. Mobile telephones, which seem to be considered essential even by people who apparently struggle to pay fuel bills, produce a margin of about 20% for O2 contract customers in the UK.

What these essential service areas have in common is the need to invest in businesses to be able to provide services and improve them. Specifically for energy, Centrica operates in a sector that is very capital intensive and where there is rising global competition for physical resources. Additionally, governments are demanding cleaner energy, and providing it costs money. In November 2012 the government announced that GBP7.6bn of investment in renewable energy capacity will be funded by customers via their bills, adding at least GBP100 (and more likely higher than lower) to annual bills by 2020. The government should do more to help Centrica explain the market realities to consumers while shouldering some of the opprobrium that rightly belongs to it. It doesn't help that the government's plans to add nuclear capacity are currently floundering.

Of course there is a potential game changer literally under the feet of the UK government, and this is shale gas. Reserves are estimated at almost 600 billion cubic meters - nearly three times the volume of "conventional" gas reserves. Sensitivity to environmental concerns is right and proper, but these have been largely addressed. On the one hand the government needs to act with boldness and courage to better explain why energy costs are high and on the other hand encourage the shale gas industry to ensure that the UK has a more balanced and cheaper energy supply.

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

Source: MarketLine

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