British Gas rejects claims of 'sickening' profits

British Gas has reignited the row over energy prices after reporting a huge rise in profits on its domestic supply business.

For 2015 as a whole, the UK's largest domestic energy supplier racked up earnings of £574m, up a massive 31 per cent compared to the total for the previous year.

Ruth London, from the campaign group Fuel Poverty Action, told The Guardian the gain was "sickening… in a year when there were more winter deaths than at any time this century".

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Wholesale gas prices have fallen by as much as 57 per cent in the past year, according to the BBC. Campaigners say the sort of bumper profits posted by British Gas proves that the "big six" suppliers are profiteering at the expense of vulnerable customers rather than passing this on.

But the companies point to the regulator's own estimates that wholesale costs account for less than half of a typical bill. British Gas itself was the last of the larger providers to cut its prices by a little more than five per cent last week, its third such cut in the past year. That's more than any other firm and Iain Conn, the boss of British Gas's parent firm, Centrica, said it had passed on the price fall in full.

In fact, Conn attributes the profit rise to a simple dynamic of increased demand. While December's temperatures were the highest for the month on record, he said, over 2015 as a whole, temperatures were cooler than the year before and as a result, gas usage rose five per cent. British Gas's other costs also fell – but the profit margin of £55 per customer remained in line with historic averages, he said.

On a wider basis, British Gas and Centrica actually saw profits fall. Adjusted operating profit for British Gas slipped two per cent to £809m, Sky News reports, while for the wider group, the figure fell 12 per cent to £1.5bn. After tax, it expects to report a loss of £1.1bn.

Consumers facing a 'postcode lottery' for energy prices

11 February

Energy customers in some parts of the country can save nearly £90 more than those in other areas "when switching to the cheapest deal", new research reported in the BBC claims.

Figures from Energyhelpline, a price comparison website, say this winter, typical annual gas and electricity bills for users paying each quarter will range from £1,227 in Merseyside to £1,144 in the East Midlands. When switching to a cheaper tariff, the difference between Scotland and the south-west of England is as much as £87.

Mark Todd, the co-founder of Energyhelpline, labelled the system a "a very unfair energy postcode lottery". He added that while there was no consistent price for energy in the UK, as the cost of delivery varies between areas, the government should set a price cap to prevent the exploitation of those "in poorer areas where consumers often lack confidence to switch".

The Competition and Markets Authority is to investigate the energy market and the prices paid by consumers, reports the BBC. The news comes after four of the UK's major suppliers announced cuts to gas tariffs following falls in wholesale prices.

After earlier reductions for customers in excess of five per cent by E.on and SSE, with the latter to take effect from the end of March, fellow "big six" suppliers Scottish Power and Npower have announced similar cuts, of 5.4 and 5.2 per cent respectively, effective from mid and late-March.

All of these cuts have been criticised by consumer groups, who argue the fall in wholesale prices should have resulted in a drop for consumers of something more like ten per cent. They have also slammed the companies for not cutting electricity prices and, in the cases of SSE and Npower, for delaying the price drops until the end of March, effectively avoiding the most expensive winter season.

SSE follows E.on with gas price cut

28 January

One week after E.on became the first "big six" energy supplier to reduce gas bills in more than six months, rival SSE has followed suit.

The company is cutting 5.3 per cent from its standard variable tariff, which, the BBC notes, is the one used most by those customers who tend not to shop around, including older and more vulnerable customers. It takes affect from 29 March and will reduce the average annual bill by around £32 to £1,068.

While slightly larger than the 5.1 per cent announced by E.on, the offer is less generous in other important respects. It is not also launching a corresponding cheaper fixed-rate tariff and perhaps more crucially, the price change is taking effect almost two full months later than E.on's, which comes in on 1 February.

"We tend to burn through a lot of gas in February and March - up to 25 per cent of our annual usage, according to one industry estimate," notes the BBC's John Moylan. "What's more, on average around 70 per cent of households are on the type of standard tariff which will be cut. But in SSE's case it's 90 per cent… In short, the bulk of SSE's customers won't have a price cut this winter."

Campaigners were also levelling similar criticisms that a five per cent drop does not adequately reflect a wholesale gas price fall of 34 per cent over the past year. There has also been no movement from firms on electricity prices.

"Again it's just a trivial 5 per cent on gas only, not electricity, nothing close to the drop in wholesale prices," Martin Lewis, the founder of Money Saving Expert, told Sky News. "Energy firms must be whooping for joy that they can get away with such small cuts."

But the firm defended the cut, saying it faces a number of other costs aside from wholesale gas, that electricity prices are not falling as fast and that it has brought forward the changes despite a price freeze announced in 2013 not expiring for three months.

The price cut was in a trading update, which revealed that SSE had lost 300,000 customers since April last year, as households continue to switch away from the big six. Reuters notes, though, that SSE is proposing to increase its dividend slightly in line with retail price index inflation.

E.on breaks cover with first 'big six' price cut in six months

20 January

German-owned energy company E.on has announced the first price cut by one of the dominant "big six" suppliers for six months, in a move that may trigger reductions across the sector.

From 1 February, the cost of E.on's standard variable gas tariff will fall by 5.1 per cent, reducing the average annual cost for a UK household by £32. The company has also launched a one-year fixed price tariff it says is the cheapest available at the moment, priced at £783, or £793 with paper bills.

This is the first cut to prices since British Gas reduced bills by five per cent in August, when it became the only one of the big six to cut charges twice in 2015, following a round of single-digit reductions. This is despite wholesale gas charges falling by 34 per cent over the 12 months, according to research from ICIS, reported by the Daily Telegraph.

A lack of price action despite the oil price-led fall in wholesale prices has become a bone of contention for consumer groups and, increasingly, politicians. Last week, Prime Minister David Cameron said prices were "not falling as fast as I would like", while Energy Secretary Amber Rudd has previously written to the big six calling for cuts.

It will be hoped this latest step by E.on, which, Reuters notes, was the first to move to lower prices in an industry-wide move last January, will trigger cuts by its rivals. Analysts have suggested British Gas may be preparing to reduce prices "to head off a political row over its rising profits", says the Daily Telegraph.

But some consumer groups remain underwhelmed by E.on's charge change. "With wholesale prices predicted to remain low this year, consumers should be seeing bill reductions of at least 10 per cent - around £120 a year - on both gas and electricity," Ann Robinson, the director of policy at price comparison site Uswitch, told the BBC.

E.on's UK chief executive Tony Cocker defended the cut. He said wholesale energy costs account for a minority of overheads – according to regulator Ofgem, they represent 42 per cent of a standard dual-fuel bill – and that it has to factor in "various other risks in the market which can change and the fact that many of the other costs that we don't control… have increased or may increase".

Energy and water prices under scrutiny again

13 January

Prices being charged by privatised utility companies are again in the spotlight as a highly critical report from a panel of MPs claims customers are overpaying on their water bills, while a survey highlights alleged profiteering by energy firms.

The report from the influential Public Accounts Committee alleges miscalculations by Ofwat have gifted water companies a collective £1.2bn windfall, the BBC notes. It says the body overestimated interest rates on the debt raised by companies to fund major works and that it had failed to factor in corporation tax cuts.

These findings echo a report published by the National Audit Office in October last year, which alleged Ofwat had failed to "balance the risks" between companies and consumers in calculating company costs related to taxes and interest rates. This in turn led to companies banking £1.25bn, of which they had only passed on £435m in price cuts.

Ofwat sets price caps at five-yearly intervals. Its latest deal, struck in 2014, commits companies to reducing bills by 5 per cent from their current average of close to £400 a year.

"Holding companies to account and protecting customers is at the heart of what we do. That's why we've made sure bills will fall by 5 per cent by 2020. We will carefully consider the thoughts of the [Public Accounts Committee]," said Ofwat chief executive Cathryn Ross.

Elsewhere, energy companies look set to face greater parliamentary scrutiny after newspapers picked up on a survey that suggested many pensioners will cut back on heating during winter to limit their bills. It comes after wholesale energy costs have fallen 50 per cent in two years, says The Times, while customer bills have fallen just 14 per cent.

ITV News notes that during Prime Minister's Questions today, David Cameron acknowledged prices were "not falling as fast as I would like" at a time of slumping oil prices. Last year, in what was interpreted as a threat of future action if they failed to act, Energy Secretary Amber Rudd wrote to the "big six" suppliers asking them to cut bills.

For their part, the firms claim that margins on retail energy are small and that a big portion of customer bills is made up of subsidies and other costs relating to broader energy investments. They also cite support they provide to help vulnerable customers.

"This winter alone, suppliers will have spent in excess of £200m supporting 1.4 million pensioners via the Warm Home Discount," said a spokesman for Energy UK, which represents suppliers.