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UK energy suppliers: higher margins will keep the heat on even as bills fall

by SuperiorInvest

Energy bills for British households are falling. But the flames of resentment over energy company profits still burn.

Energy regulator Ofgem he announced this week, new price caps for electricity and gas units can be charged by suppliers from July. A typical annual household bill will drop to £2,074. It used to be £2,500, including government subsidies.

But households will still pay an average of 60 percent more than before Russia’s invasion of Ukraine exacerbated a surge in wholesale prices.

Unions and campaigners responded by attacking Ofgem for failing to reach out to energy companies. “profiteering”.

The trouble is, not all energy companies are created equal. Even some big companies have a loss at home energy sales. Of the three major companies that still take revenue from domestic supply – British Gas, EDF and ScottishPower – only the former was in the red in 2022. But other divisions such as power generation had a bad year.

For small businesses focused solely on domestic deliveries, the surge in wholesale prices was disastrous. As of 2021, more than 30 companies that did not have access to funds from other divisions or outside investors have gone bankrupt.

Suppliers complain that the cap prevents fair profits. Ofgem responded with a plan to change allowances for profit margins. These are currently set at 1.9 percent. Schedules a new variable element.

Assuming the typical annual bill remains around £2,100 from October, the amount customers would pay on suppliers’ income would rise by £10 to £47 per customer, according to the proposals. That could mean £56m of extra EBIT for British Gas owner Centrica, Jefferies estimates.

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

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