How energy firms disguise their profits

Energy firm profits are back in the headlines. But how much profiteering is really going on? And how can you ensure you aren't being taken advantage of?

Energy companies are adept at presenting their price increases as a necessity, but is this true?

The biggest six suppliers, which cover close to 100% of the entire residential gas and electricity market, often bring up the rising cost of gas and electricity in their defence when increasing tariff prices, but they fail to mention it when their costs fall.

They talk about the heavy investment they're always making, but they fail to explain that those investments will often help them to make even more money.

They also focus your attention on “margins” instead of profits, meaning they say that they're just making 5% profit per customer, or £50 per year. Something like that. But these figures easily disguise the other ways that the companies are making their shareholders and directors richer.

Indeed, the more money they're making, the more aggressively they seem to deny it.

But how much profiteering is really going on?

Finding the truth from all this is not easy.

I have looked through some of the most important numbers from all the accounts of the big six suppliers over the past ten years.

Unfortunately, five of the six do not separate their UK residential supply figures from the rest of their operations, or at least they haven't done so over enough years to get a decent picture.

As someone who reads a lot of company accounts, I find this extraordinary. You would normally expect a business to separate any important segments from the overall figures. Residential supply is clearly distinct from corporate and industrial supply, and supply in general is very different to their generation or distribution businesses.

Sometimes the most important figures for the UK weren't even separated out from Europe, despite the huge scale of these companies' UK operations.

Unfortunately this makes it impossible to pull out definitive numbers. The general trend was a rise in profits, but without knowing how much of that comes from the UK residential consumer, we can't prove anything.

British Gas triples its profits

British Gas is the one supplier that has consistently separated UK residential gas and electricity profits from its other residential services, commercial services, and other businesses.

While it is one of the most aggressive at defending itself – always finding numbers that can put it in a better light – you can't get around the staggering increase in money that it has made from UK households over the past ten years.

Its profits during the three years from 2003 to 2005 totalled £670 million, whereas in the three years from 2010 to 2012 its profits were £1.87 billion. 

If you triple your profits by attracting more customers by being the cheapest supplier, that's ok. However, British Gas had around three million fewer customer accounts in 2011 than it did in 2003.

We can't know if this is representative of all the other major suppliers, but the fact that none of them really stand out with much lower standard tariffs indicates they could be all the same, in this regard.

That's the way it should be

Speaking as a shareholder in several of these companies (most of you will be too, like me, through investment or pension funds) I would hope they're not just giving away profitable opportunities. These companies are legally obliged to try to make profits for their shareholders. 

As much as you might not like it, they're only doing what they're allowed to get away with. That's what all companies and individuals do, whether you're an energy company trying to get extra profits, or an office worker sneaking an extra ten minutes onto your lunch break.

The fact that the latter is a breach of contract and the former means the directors are doing their jobs right means that it's up to regulators and, ultimately, politicians to set things straight.

What the Government is doing

The easiest and best way to fix this is to make competition work better and to make energy tariffs clearer. The regulator and politicans are starting to do that.

Tariffs will soon be simplified to a standing charge and one unit rate. You're going to get clearer statements to help you too. Also, suppliers won't be allowed to leave you on certain expensive, very old tariffs if they're no longer available to new customers. Read New rules to limit energy tariffs suppliers can offer.

It's a bit early to hold your breath, but Ofgem, the regulator, has also tentatively suggested it might force suppliers to tell long-term non-switchers what the cheapest deal on the whole market is.

However, the changes going through will still leave suppliers able to offer a million deals, despite the claim they'll be reduced to four. This is because there appears to be no limit to the number of introductory deals they'll be allowed to offer you.

Even worse, while media commentators are cheering that suppliers will have to tell their customers once a year if they have a cheaper deal for them, the regulator doesn't appear to have said that suppliers must offer the cheapest, newer deals to existing customers.

This means that you might be even more easily tricked into believing you're on the cheapest tariff than previously. Suppliers simply write to you: “We're happy to say you're on the cheapest tariff available to you.” True, but not the actual cheapest tariff they've got. Well done, Ofgem.

What you can do

You could write to your MP or Ofgem, but, even better, you can use the energy companies' own techniques against them.

I did notice something interesting in the text of an npower report in the early noughties. The company made clear that it had changed its strategy to let go of customers who shop around – because the real money is with the customers too lazy to switch out of expensive tariffs.

Energy companies profit from the huge number of idle customers who don't switch regularly, or at all. The big suppliers probably make very little money, if any from customers who switch once a year, because they pay far, far less.

Those who shop around for gas and electricity, as well as other related services (such as energy-saving measures and boiler fitting) are the real winners of the UK residential supply market and how it works – just as much as the energy companies' shareholders. So make sure you use our energy quote engine to see just how much you could save.

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