Sometimes a story is repeated so often that its veracity is never challenged. One such is the myth that British households are in thrall to a wicked energy cartel that puts excessive profits above common decency. So much so, indeed, that the government and the opposition parties have all signed up to some form of energy cap designed to keep energy prices affordable.
The grain of truth in this story is that, aided by a craven regulator, the “big six” – British Gas, EDF Energy, E.ON, Npower, Scottish Power, and SSE – have on many occasions operated a cartel to hold prices up. How else can we explain, for example, recent British Gas price increases in the face of a collapse in their customer base?
“British Gas owner Centrica lost 110,000 energy supply accounts in the first four months of the year. That is roughly equivalent to 70,000 customers as many households buy their gas and electricity from British Gas, so will have two accounts.
“Last year, the company lost 1.3 million energy accounts…
“In April, British Gas announced a 5.5% increase in both gas and electricity bills, which comes into effect at the end of this month. It blamed the rising wholesale cost of energy and the cost of meeting emissions targets and introducing smart meters.
“Other big energy firms have also announced price increases this year, including Npower, EDF and Scottish Power.”
This is surely evidence of a cartel being operated behind the back of the regulator… or is it?
There is an alternative explanation for the recent behaviour of the soon to be Big Four that should send a shiver through the UK economy. Toward the end of last year, Jillian Ambrose at the Telegraph reported that:
“Britain’s second-largest energy supplier is eyeing the exit as the Government’s crackdown on energy bills threatens profits.
“SSE, formerly known as Scottish and Southern Energy, may turn its back on supplying gas and power to almost 8m British homes after years of political threats against the six largest energy companies comes to a head.
“City sources say the FTSE 100 energy giant is quietly discussing early plans to sell off its customer accounts, or even spin the business off as a separate listed company in order to focus on networks and renewable energy and avoid the Government’s looming energy price cap.”
Some months earlier I took the time to examine Centrica’s (British Gas’ parent company) annual accounts. The results are not pretty:
“While Centrica profits were down (but still high) the division of British Gas that supplies electricity to UK consumers (businesses and households) actually made a loss of £61.1 million last year – in the household market, the loss was even bigger at £71.9 million. That is, business electricity consumers are subsidising household electricity to some extent, while Centrica itself is subsidising its UK electricity business out of the profits from its other divisions. Despite this, of course, electricity consumers are facing increasing bills even as they scale back their consumption. This is exacerbated by the government decision to load the cost of renewables, new gas and new nuclear onto customers’ bills; effectively creating in all but name an even more regressive tax than VAT.”
Centrica’s response at the start of this year was to axe 4,000 jobs; having previously ceased maintaining the strategically essential Rough natural gas storage facility in the North Sea. SSE in the meantime has announced a merger with N-Power in an attempt to rationalise both company’s retail energy business. Unfortunately, no business to date has managed the trick of cutting its way to greatness… particularly in an economic climate in which ever fewer consumers can afford the service.
Centrica’s route out of an increasingly unprofitable domestic energy supply sector will be to focus on its much larger international energy business. Britain’s remaining retail energy suppliers – all of which are foreign owned – may not enjoy this option. For example, EDF’s wholesale energy investments are tied up in an increasingly risky and very-likely loss-making nuclear power sector. Nor is there much to be gained from investment in renewable energy technologies that depend upon uncertain government subsidies that have become politically toxic among ordinary voters.
Underlying all of this is a fundamental truth that few are prepared to contemplate: with the end of the last supplies of cheap fossil fuels, there is no affordable energy mix for the foreseeable future. No combinations of gas, nuclear and renewables can be developed and deployed at the same time as prices are held at levels that are only just affordable to millions of British households. Nor is there any option of returning to cheap gas from depleted North Sea deposits; still less reopening coal deposits put out of reach by the Thatcher government.
For the moment, the UK government is content to fill Britain’s energy gap with imports. However, as global energy supplies begin to tighten once more, pricing and profitability issues are likely to rise up the political agenda again. Faced with an increasing struggle to remain profitable, and in the face of a government determined to add the cost of green energy onto domestic bills while legislating to prevent those bills from rising, companies like Centrica may simply choose to walk away. After all, one of the blessings of being a private corporation (as opposed to a public utility) is that nobody can stop you from closing when you run out of money.
As you made it to the end…
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