UK energy suppliers: higher margins will keep up heat even as bills drop

Energy bills for British households are falling. But flames of indignation at energy company profits still burn.

Energy regulator Ofgem announced this week new caps on the prices per unit of electricity and gas suppliers can charge from July. A typical annual household bill will fall to £2,074. This had previously been £2,500, government subsidies included.

Households will, though, still pay on average 60 per cent more than before Russia’s invasion of Ukraine exacerbated sharp wholesale price rises.

Trade unions and campaigners responded with an attack on Ofgem for not addressing energy companies’ “profiteering”.

The difficulty is that not all energy companies are equal. Even some big companies make a loss on domestic energy sales. Out of three large companies that still strip out their domestic supply earnings — British Gas, EDF and ScottishPower — only the first was in the black for 2022. But other divisions such as electricity generation had a bumper year.

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For small companies focused solely on domestic supply, sharp rises in wholesale prices were catastrophic. More than 30 companies that could not access funds from other divisions or external investors went bust from 2021 onwards.

Suppliers complain the cap prevents fair profits. Ofgem has responded with plans to change profit margin allowances. Currently these are set at 1.9 per cent. It plans a new variable element.

Assuming a typical annual bill remains at around £2,100 from October, the amount customers would pay towards suppliers’ earnings would rise by £10 to £47 per customer under the proposals. For British Gas owner Centrica, this could mean additional ebit of £56mn, estimates Jefferies.

Expect anger at the sector’s finances to take a long time to burn out.