British Gas profits explode

The energy supplier is going to face questions from customers after it hiked its tariffs, only to make bumper profits. But that could benefit the entire economy.

by Emma Haslett
Last Updated: 24 Feb 2011
Expect the usual round of ire from Outraged of Milton Keynes et al, after Centrica posted a £2.4bn operating profit for 2010, almost a third more than the previous year. But all eyes are on British Gas, its retail energy arm, which also saw its operating profit jump by 24% to £724m. That’s going to upset the 8m customers who were hit by a 7% price hike right in the middle of the cold snap – but then again, without that profit, Centrica wouldn’t be able to keep making much-needed investment...

The bumper profits have come just as industry watchdog Ofgem winds up a report into energy suppliers’ margins. Most companies have seen increases, despite telling consumers they’re only raising tariffs because the price of fuel has risen. The figures from Centrica have already caused some analysts to call for on the Competition Commission to start an inquiry, but a full-scale one seems unlikely. As one analyst put it, ‘If the UK retail energy market is a cartel then it’s the worst cartel in history. Of the six players, only one makes any money’.

But there isn’t much chance of that placating customers. Centrica says the lion’s share of its profits have been driven by ‘excellent drilling success’ in its upstream business, ie. it’s getting more gas out of the ground, and as energy prices have gone up, it’s been able to sell it for more. And it said that while it did raise tariffs in December, British Gas prices were still 0.5% lower at the end of 2010 than they had been at the beginning, after it cut its bills by 7% last February.

There’s also the question of investment. As part of its results, Centrica said it had invested £1.7bn in 2010, and plans to make £1.5bn worth of much-needed investment in the UK’s energy infrastructure. It also made £450m of investments in gas fields in the North Sea and, crucially, plans to create another 2,600 skilled jobs in the UK in 2011. Without that profit, it wouldn’t be able to make any of those investments – and given that unemployment is still on the rise, that’s quite an important point.

Still, with the violence in North Africa, plus demand from emerging markets meaning energy prices are threatening to climb their way to henceforth-unknown levels, the likelihood is that margins will be squeezed over the next year – so the chances of another year of bumper profits are slim.

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