SSE critics must consider margin, not profit

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23 May 2013, Gas, Electricity

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In the Datamonitor piece "Centrica tackles the issue of high winter gas demand and profits" we pointed out that although the company's profits appear high, margins are not. This time SSE is the subject of criticism. The company is a major player in the UK market, second only to market leader British Gas. In the residential gas market SSE has a 16% share and for power the figure is 18%.

However, although this looks good on paper, SSE lost about 325,000 power customers in the year and a half to the end of 2012 (source: Datamonitor's Residential Market Share Monitor Q1 2013 [EN00041-026]) and a smaller number of gas customers. One of the factors behind this hemorrhage was a doorstep mis-selling scandal that saw SSE deservedly clobbered by a record fine earlier this year. It was not easy to clamber out from the wreckage caused by this disaster, and SSE's rehabilitation has been set back by the profits row.

Despite all this, SSE and its peers have a strong case to rebut the criticism. SSE's operating profit margin for the supply business was 4.2%, which cannot be said to be excessive by any standard. In the generation part of its business profits fell and, according to SSE, "much electricity generation from gas-fired power stations in particular was barely profitable, if at all." With gas prices as high as they are this is entirely reasonable. Although the storm following the latest results announcement will abate, SSE faces a tough public relations struggle in 2013, as it warned duel fuel customers that they could be hit by price increases of up to GBP80 in 2013-14.

The next UK election is due in 2015 and with energy bills rising remorselessly - and unavoidably in view of the market structure - power and gas suppliers will find that the criticism received to date is just the start. SSE and its competitors need to do a much better job explaining themselves. / / @DatamonitorEN

Source: MarketLine

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