How to avoid the next big energy price rise

British Gas profits are up 200% over nine years, thanks to massive price increases. Read how to avoid the coming £100 winter energy price rise.
You may have read that British Gas has been preparing the ground for an increase in energy prices once again.
Reports suggest our bills are set to go up by as much as £100, just in time for winter. But,as I'll explain shortly, you can avoid all of this increase if you act fast.
British Gas blames rising costs
British Gas is partly blaming a 15% rise in wholesale gas prices. The “wholesale gas price” is what energy suppliers pay for the gas that they sell on to us customers.
That's not to say they're actually buying any gas at today's higher wholesale prices, however. The big suppliers can and do order extra gas years in advance, when prices are cheaper.
None of them reveal precisely when they buy gas, or the price they have actually paid. This means we won't ever know if British Gas really needs to pay an extra 15%, or if it's using that as an excuse.
Our bills shouldn't rise 15%
The good news is that our household energy bills shouldn't go up by 15%.
Wholesale gas prices are just one cost that suppliers face. They also have to buy wholesale electricity, and pay for infrastructure, staff and offices. So a 15% increase in wholesale gas prices may only be, say, a 5% increase in its overall costs.
Indeed, while £100 is an awful lot of money, that's still an increase of less than 15% to or energy bills.
We're paying to rapidly boost British Gas' profits
That doesn't mean British Gas and its owner, Centrica, aren't profiteering. Far, far from it.
The long-term record of rising profits paints a clear picture:
British Gas' profits and Centrica shareholders' dividends*
3-year period |
BG Residential profits |
Centrica dividends per share |
2009-2011 |
£1.86bn |
42.5p |
2006-2008 |
£1.05bn |
33.7p |
2003-2005 |
£633m |
22.5p |
*A “dividend” is income paid to shareholders from company profits. A rapidly rising dividend over many years, such as shown in this table, is demonstrative of a business that is quickly increasing its profits. Don't think that, because the dividend is measured in pence, it means it is insignificant!
The staggering rise in profits shown in the above table speaks for itself. Remember, “profit” is the amount of money the company makes for itself and its shareholders, after it has paid for investment and wholesale energy costs.
You can't argue that the profits, which are up 200% in nine years, are due to winning more customers. In 2001 British Gas Residential had 18.8m residential energy customer accounts, but in 2011 just 15.9m.
Centrica shareholders have clearly done very well from what I see as a distinct lack of competition in the industry. Both Centrica's dividends and share price have massively outstripped inflation. The share price has more than doubled, up 2.3 times since the beginning of 2003.
How to avoid the coming price increases
Fixed deals currently look well priced, and will help you to avoid any chain reaction of winter increases that British Gas is preparing to set in motion.
EDF Energy's Blue +Price Promise tariff is the cheapest for many customers, beating even the cheapest variable tariffs. The tariff's average bill was around £1,050 in the few sample tests I conducted. It is fixed until September 2013.
EDF Energy says this tariff has no tie-ins or cancellation fees and it promises to tell you if another supplier is cheaper. This is a confident move. It could be a sign the supplier also thinks energy prices are rising.
Sainsbury's Energy and first:utility offer fixed tariffs that are just £20 to £30 more expensive. These are fixed till June 2013 and September 2013 respectively.
Don't expect fixes to remain this cheap for long. Customers are starting to worry about higher prices, so you need to compare and switch gas and electricity supplier quickly before everyone else has the same idea.
However, check your cancellation charges before switching. Most tariffs have early cancellation penalties if you switch within a specified period, which is usually 12-14 months.
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Thanks joannakd. I think I was pretty clear, but sorry you didn't think so. Where I wrote BG in the article, I meant BG, and where I wrote Centrica, I meant Centrica. So when I wrote about profits and called them "BG Residential's profits", that's what they were. On your question about meters and the rest, I don't think there's any need for me to go into each of the infrastructure or other projects that BG (or Centrica) are doing in order to elaborate on the point my article was making. It would also require quite a lengthy essay, I expect. Neil
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Centrica is a huge company made up of various subsidiaries. The article is too generalistic. Is BG the subsidiary making the money ? What about other parts of the business ? What about the meter exchange programme over the next decade ? Who is paying for that (even though it's 'free' for us) ?
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Businesses will never move in a smooth direction, DaveDB, that's why my figures average profits and dividends across several years, and compare them to similar periods earlier on. This is much more revealing than your 2011 snapshot, as Benjamin Graham and every other respected and successful fundamental investor or businessman would agree. "Centrica profits fell 30% in 2011 because of higher gas prices and amounted to £52.00 per domestic customer... not exactly a rip-off!" I can understand why think that about profit per customer. I had anticipated that someone would make a point along those lines, but unfortunately there was no space for me in my article to explain in very plain English for the average reader, who doesn't understand investing, why your point isn't correct. Firstly, we shouldn't take your figure of £52 for the reason I just gave -- it is a single-year figure and we should take the average over several years. However, I don't know the three-year average per person off the top of my head* and it's not worth looking up, so for arguments sake we'll use your £52 figure anyway. Consider why the profit figure per person is so low. For years, BG and Centrica have been buying companies and assets left, right and centre in order to make their business even stronger and to integrate profitable entities to the group. (Of course, Centrica always says that it's investing for the UK's future energy needs! How selfless of them.) When it spends money on those things, it doesn't have to declare that money as profits. Nevertheless, the business is getting better and more valuable, and the shareholder is benefitting. Hence, despite such an apparently small profit margin per customer, they have doubled the dividend and more than doubled the share price over nine years. Indeed, BG has been spending far more on investing in assets and businesses than it has been keeping as profit, which disguises its success. In the long run, those assets are likely to be even more valuable to BG than the profits themselves. The point is that BG customers are not just paying for its profits, but for its expansion, empire building and moat-digging too. That is more secret. It's also too complicated for my article, but, really, the trend in profits makes my point clearly enough: that BG can't keep telling us every year that prices rises are not at all about increasing profits. Neil *You can't simply average the three-year profits between the 15.9m accounts mentioned in my article, because many customers will hold more than one account.
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17 May 2012