British Gas owner Centrica's falling profits show why it can't keep cutting prices

Wholesale prices may be falling, but Ofgem seems to have forgotten companies have to buy their energy in advance.

by Rachel Savage
Last Updated: 19 Feb 2015

Sam Laidlaw’s final results as chief exec of British Gas owner Centrica are more cold shower than toasty warm. Operating profit in its household energy supply business fell 26% to £265m in the first half of this year in the unseasonably warm weather.

Meanwhile, operating profit for the whole group slumped 35% to £1bn, which Laidlaw also attributed to generating companies whacking Centrica with extra costs during the US ‘polar vortex’ (aka very, very cold weather).

‘The good news from a customer's point of view is that actually we expect average bills to be down by some 7%, or £90, this year,’ Laidlaw told the BBC. But that’s not because British Gas has passed on falling wholesale energy costs, rather down to its average customer using 24% less gas in the mild winter.

Ofgem, which ordered a competition inquiry into the energy market in March, has been turning up the heat further on the ‘Big Six’ companies (Centrica, E.on, Npower, SSE, Scottish Power and EDF) over said falling costs. It claimed yesterday they are set to double their household supply profit margins in the next year and questioned why bills haven’t been cut to reflect those. Industry body Energy UK hit back, claiming the regulator’s numbers were ‘inaccurate’.

Energy companies clearly still need to get back in consumers’ and politicians’ good books, then, after becoming public enemy number two (bankers are numero uno, natch), following annual winter bill hikes last year and Ed Miliband claiming Labour would freeze prices if it wins next year’s election. Incoming Centrica boss Ian Conn, the current head of refining and marketing at BP, definitely has a job on his hands.

But Centrica’s fluctuating profit is a reminder of the sensitivity of short-term results to uncontrollable factors like weather, and the fact that companies have to buy energy in advance to hedge against those and changing costs. If wholesale energy costs stay low, even with geopolitical turmoil in Russia and beyond, there would be a more solid argument for bringing bills down.

Ofgem needs to be honest with consumers – energy companies can’t necessarily slash bills at a moment’s notice and stay profitable. But it probably won't do that, as it's likely being told by the government to cook up a storm to distract by the fact that the energy industry is ultimately suffering from a chronic lack of investment. And if it pushes the Big Six too hard, their largely foreign shareholders will merrily up sticks and leave us with even more lights out.

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