Why Are Energy Bills Rising When Suppliers Are Making Record Profits?

The contrast between the pain felt by consumers and the record earnings of oil and gas giants explained.
Bills are set to top £4,200 per year for the average British household from the start of January, after already rising to £3,600 in October.
Bills are set to top £4,200 per year for the average British household from the start of January, after already rising to £3,600 in October.
Andrew Matthews via PA Wire/PA Images

Households are facing dire financial straits because of soaring energy bills at the same time as companies that provide the power are making record profits.

Frances O’Grady, the general secretary of the Trades Union Congress, has summed up the anger of many struggling to make sense of the disconnect.

She said: “These eye-watering profits are an insult to the millions of working people struggling to get by because of soaring energy bills.

“Working people are facing the longest and harshest wage squeeze in modern history.

“It’s time working people got their fair share of the wealth they create, starting with real action to bring bills down.”

But “real action” may be some way off.

On Thursday, crisis talks to “knock some heads together” between energy sector bosses and the government has led to no new policies.

Why are energy prices increasing?

The recent surge in energy prices has been driven by wholesale prices, specifically the soaring cost of gas.

Gas prices on global markets have surged by as much as six-fold, having leapt higher before the invasion of Ukraine.

Last year, countries in Asia and Europe used significant amounts of gas stocks during a long winter which helped to drive up prices while the reopening of economies as the Covid-19 pandemic receded also sparked higher energy usage.

More recently, the invasion of Ukraine by Russia has led to a restriction of Russian gas which has in turn pushed prices higher.

In the UK, very little gas is sourced from Russia but this has not shielded suppliers from the pricing impact across the rest of Europe, which typically sourced around 40% of natural gas from Russia.

The soaring wholesale prices has led to energy firms passing those costs onto customers – pushing up household energy bills by unprecedented amounts.

Former prime minister Gordon Brown has proposed a temporary re-nationalisation of energy companies failing to cut bills for hard-pressed families.
Former prime minister Gordon Brown has proposed a temporary re-nationalisation of energy companies failing to cut bills for hard-pressed families.
Andrew Milligan via PA Wire/PA Images

Bills are set to top £4,200 per year for the average British household from the start of January, after already rising to £3,600 in October.

It will mean increased pain for households, with bills in the month of January alone likely to hit more than £500.

Median household income in the UK is just £31,400 – so the January forecast could eat up around 13% of that.

How well are energy companies doing?

The headlines have been dominated by Shell, BP and British Gas owner Centrica as they have announced bumper financial results.

Last week, BP revealed second-quarter profits more than trebled to a 14-year high. The oil giant reported underlying replacement cost profits – its preferred measure – jumping to a far better-than-expected £6.9 billion for the three months to June 30, up from £2.3 billion a year ago.

A week earlier, Centrica’s half-year profits soared five-fold to £1.3 billion, while Shell achieved a record second quarter result as adjusted earnings hit nearly £9.5 billion.

These are multi-faceted companies where selling energy to consumers is only a small part of the business.

The UK’s other big energy suppliers include:

E.on UK: In the first six months of the year the business made adjusted earnings before interest and tax (Ebit) of £245 million in the UK, up 77% on the year before.

EDF Energy: The company made earnings before interest, tax, depreciation and amortisation (Ebitda) of £728 million in the UK in the first six months of this year.

It was a rise of more than 200% compared to the £226 million in the same period a year ago.

Most of this was because EDF produced more electricity from its nuclear plants in the country. It was partly helped by higher prices of the energy it sold to businesses, but was weighed on by the sale of energy to households.

Octopus Energy: The company’s last set of numbers shows it managed to halve operating losses from £63 million to £31 million in the year ending April 30, 2021. It took a £150 million hit to help customers through the energy crisis.

ScottishPower: In the first six months of 2022 the business made an Ebitda of £924.6 million – a rise of 2.6%. Most of that was thanks to a jump in the money its wind turbines and other renewable generation made from selling electricity.

The company’s retail business, which sells energy to customers, made £54.3 million in Ebitda over the period, a reduction of 60%.

How are the profits justified?

The contrast between the financial crisis hurting British families and the bumper profits has fuelled the calls for the government to intervene beyond May’s “windfall tax”, which gave every UK household an energy bill discount of £400.

But energy companies argue the equation is not as simple as presented, and point to a series of factors in defence of the sector.

Energy companies were losing money

Not so long ago, many of these companies were in the red. Shell has recovered from a loss of almost £14.7bn in 2020 when energy prices slumped during the pandemic.

The oil price collapse of 2020 – when at one point oil prices fell to negative figures for the first time in history – saw producers paying buyers to take the commodity off their hands as there was nowhere to store it.

They won’t say it very loudly, but energy bosses would argue no-one was offering to subsidise their losses back then – so why should they share their profits now?

Now they are profitable again, they argue they are investing in modern technology that they have not been able to because of the commodity price collapses of not just 2020 but in 2014-15 too. When a No. 10 statement on Thursday talks about wanting to ensure the sector “invest further and faster in British energy security”, this is what they are alluding to.

Underling the volatility of the industry, 28 energy suppliers have collapsed since June last year because of the same wholesale price spike fuelling the profits of others, but they were not able to increase costs to customers because of the energy price cap designed to protect consumers.

Energy bills is not the major source of profit

The price cap on bills prevents firms from taking excess profits from the gas and electricity they sell to households. The companies are currently allowed to make earnings before interest and tax of £35 per household.

So the big money comes from elsewhere, with the oil and gas giants employing thousands of traders to buy and sell commodities produced by other firms and make profit on fluctuations in its market price.

The more volatile the market, the more money they can make. Extremes in prices has been the hallmark of the last few years, with traders selling oil and gas for more than double the price it was receiving just months earlier.

Unveiling its latest results, Shell said the price of the barrels of oil it sells rose from $62.53 a year ago to $101.42. Gas prices rose from $4.31 to $13.85 per thousand standard cubic feet over the same period.

The “upstream business” – extracting oil and gas – is another major source of profits. Centrica, which owns British Gas, the biggest energy supplier in the UK, saw adjusted operating profit for this arm of the business reach £906 million in the first six months of the year – an increase of more than 1,100%. At the same time, British Gas itself saw operating profit fall by 43%, hitting £98 million.

But exactly where the money comes from is likely to be a moot point to those having to choose between heating and eating this winter.

What are the options for helping households?

Windfall tax

The government introduced a windfall tax on oil and gas company profits in May, but both Labour and the Liberal Democrats are calling for the tax to go further.

The Liberal Democrats suggest increasing the rate from 25% to 30%, expanding it to cover profits dating from last October, and for it to cover a bigger share of what companies make globally.

Re-nationalise energy companies

Gordon Brown has proposed a temporary re-nationalisation of energy companies failing to cut bills for hard-pressed families.

The ex-prime minister’s plan involves scrapping the energy price cap and renegotiating new lower prices with companies.

Brown goes on that the government should consider bringing into public ownership companies who could not meet that requirement “as a last resort ... until the crisis is over”.

Slashing taxes on energy bills

A quick and perhaps easy remedy would be for VAT to be cut on household energy bills.

But the proposal would provide limited relief to households, especially those most in need of help.

If the price cap reaches £4,266.48, as Cornwall Insight predicts it will in January, a VAT cut would slash £203.17 off bills.

That would only relieve a small amount of the £1,466 that is expected to be added to energy bills since the last time the government announced support.

Slashing green levies on energy bills

A temporary cut to the levies that households pay to ensure renewable energy generation is funded.

Some energy insiders support the idea – but only if those payments are instead made from taxes. Cutting the payments entirely would damage the UK’s path to net zero and leave the covernment open to legal action.

But again, the benefits would be small, cutting the two main green parts of the energy bill – the renewables obligation and the green gas levy – would only save around £80, according to experts at energy consultancy Auxilione.

More green parts of the bill could also be cut, but this would only add an extra £80 on savings.

Consume less energy

One of the best ways to protect households are for them to use less gas and electricity, especially through the winter.

The Labour Party has called for 19 million draughty homes to be upgraded with better insulation. This would cut energy bills for good and help the UK reach its environmental targets.

However it is a big job that will take years and will not provide immediate relief for households this winter.

More immediately, experts say that by reducing the flow temperature on your boiler and turning off the boiler’s pre-heat function you can reduce your bills by hundreds of pounds without reducing your comfort.

Cancel the price cap rise

The Liberal Democrats have called on the government to recall MPs to London to pass a law that would cancel the rise in the energy price cap.

The government would then pick up the difference, by levying an even bigger windfall tax on oil and gas companies. The party claimed it could raise £20 billion this way.

A social tariff

This is the option supported by many energy companies, who question if the current price cap is up to scratch.

In simple terms it would mean that the most vulnerable households would pay less than everyone else for their energy bills. Broadband providers already offer social tariffs.

How exactly it would be targeted remains to be seen, however the idea has won backing from Utilita chairman Derek Lickorish, ScottishPower boss Keith Anderson, and E.on chief executive Michael Lewis.

Why is the current government not acting?

Outgoing prime minister Boris Johnson has been clear that he will leave decisions on further support to his successor in No 10, with major policy announcements postponed.

Chancellor Nadhim Zahawi has instructed Treasury officials to provide details of options available to the new leader, who is expected to be in post on September 5 at the earliest, but an emergency budget is the next expected major fiscal event.


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