Last year I asked Ofgem, the Office of Fair Trading (OFT) & the new Competition and Markets Authority (CMA) to start producing annual competition assessments which will look at the way energy companies operate in detail. They will also set out any actions they deem necessary.
The first of their reviews will be published this Spring and I have just written to them outlining new evidence I want to be considered as part of their investigations.
Essentially the new evidence focuses on the profits some energy companies are making on supplying household gas. This is different from the recent debate on energy markets which has concentrated almost entirely on electricity. We’ve taken action and Ofgem has pushed competition in this area. And the reform of electricity markets seems to be the only area that Labour focuses on. So, my team’s analysis on gas is a new development.
You may have heard energy suppliers justifying profits by saying they are generally in line with those made by the large supermarkets. The analysis I have put to the regulators shows a rather different picture. What do the figures show?
Firstly, the average profit the Big 6 are making on supplying household gas is 6.7%, more than three times what they make on supplying electricity (1.8%). Some – British Gas and SSE – are actually making more than 11%, more than 5 times the average electricity profit and more than double the typical supermarket profit. If the profits were brought into line with those being made on electricity then consumers would see an average £40 come off their annual bills. This has to be looked at and explained.
Secondly there is an issue with ‘market share’. One supplier – British Gas – has more than 40% of the market when it comes to supplying household gas. While Lib Dems in government have made it far easier to switch – and more than 1million consumers did exactly that in the last 2 months of 2013 – British Gas retains a huge share of customers, many of them from when they had the gas supply monopoly.
Lastly there is the question of what the Big 6 charge their customers for gas. For example, if British Gas was amongst the cheapest out there, then consumers could legitimately ask ‘so what?’ Actually, British Gas has been at the highest end of the market for the last few years.
It is of course now down to the regulators to decide how they take this forward. If they find this issue merits further investigation, and find any company with a monopoly power resulting in consumers getting ripped off, they can take action. They can look to break them up, or introduce other measures to resolve the issue quickly.
What is clear is that Lib Dems in Government are determined to ensure consumers are getting a fair deal. The first Annual Competition Assessment is ‘looking at the books’ of the Big 6, and I want today’s new evidence to support their work. But already we’ve forced the energy companies to simplify tariffs, introduced more competition by doubling the number of smaller players and we’re looking to slash the time it takes to switch supplier.
Compare this to Labour’s offer: a temporary price fix that would result in suppliers hiking up prices both before and after and some ideas about getting rid of vertical integration in electricity, an issue that has no relevance to the gas market.
Rather than the fantasy of economically illiterate policies of Labour, the Coalition has acted fast to take an average £50 off bills and introduced real competition. Today’s news should be welcomed by consumers across the UK.
* Ed Davey is the MP for Kingston & Surbiton and Leader of the Liberal Democrats
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13 Comments
‘Firstly, the average profit the Big 6 are making on supplying household gas is 6.7%’
Is this the gross margin on their gas sales, or net of overheads? What profit rate do you consider normal/achievable for a business which also needs to invest and therefore be a sustainable supplier?
“Some – British Gas and SSE – are actually making more than 11%, more than 5 times the average electricity profit and more than double the typical supermarket profit.”
But average profit of the big six actually turns out to be remarkably similar to the ~5% average profit made by supermarkets, correct?
I’m not sure in which direction I should pursue this remarkable factoid…
Today of all days we might have expected the Secretary of State for CLIMATE CHANGE to talk about that subject.
But Ed Davey is silent on the subject. Is he under the thumb of those in the Tory Cabinet who continue to deny climate change?
When he is not colluding with the Nuclear lobbyists, he is blaming it all on the Labour Party. But it is not the fault of the Labour Party that despite his promises this is most definitely not the greenest government in history. It is potentially the most radioactive government in history.
10% = Lowest poll for LDs with ICM since Feb 1991.
New thread needed?
If Ed were to be a little less selective in his use of statistics he might have noted that the before tax margin on gas of some other Big 6 companies showed them selling gas at a loss in some years. British Gas, as the market leader, would find itself at odds with the Competition Commission if it were to try to do the same. Being rather less selective, the post tax margins for dual fuel are about 4-6% – and have been for some years. Other than the Big 6 there have been a number of less vertically integrated smaller suppliers who have gone bust as a result of the squeeze in margins. Is this what Ed Davey would like to happen to one of the Big 6? Hardly the way to encourage competition.
I’m really disappointed in EdDavey today. His ill-informed but ultimately populist set of half-truths has once more sent investors running for the hills. They’re unlikely to invest in any company that isn’t allowed to make a profit. Like Ed Miliband and his price freeze, this is economic vandalism to make a score a few political points. I expected better.
“You may have heard energy suppliers justifying profits by saying they are generally in line with those made by the large supermarkets. The analysis I have put to the regulators shows a rather different picture. What do the figures show?”
Perhaps LDV could ask Ed Davey to post such a comparison.
Anyone interested in the reality of fuel bills might like to read this from Roger Williams, a Liberal Democrat MP who has not had his head turned by the bright lights of ministerial status —
http://centrallobby.politicshome.com/latestnews/article-detail/newsarticle/roger-williams-mp-fuel-poverty-and-cold-homes-heating-up-living-standards-debate/
Before I even start to look at what he has written, can I ask “Why suddenly Edward, not Ed?”
Tim13 11th Feb ’14 – 8:44am
Before I even start to look at what he has written, can I ask “Why suddenly Edward, not Ed?”
Well Ttim it is just like his position on Nuclear power.
He became a terribly important Cabinet minister, so he changed his mind and he changed his name.
That should be Tim not Ttim. Must be the radiation …
@Tim13 “Why suddenly Edward, not Ed?”
Because he’s been a very naughty boy 😉
It is not at all clear to me why a comparison is being made between the supermarkets and the large energy companies when there financial structures are fundamentally different. Supermarkets are essentially labour intensive with requiring little by way of capital investment. Even Morrison’s and Sainsburys which do hold many of their stores on a freehold basis are being urged to sell off the freeholds so as to return money to shareholders. The large, vertically integrated energy companies on the other hand have massive capital investments which have to be depreciated over decades. Such investments are inevitably far more risky and investors therefore require a much higher return on their investments. While splitting the integrated suppliers may help in identifying the different risk/return characteristics of the supply chain it is evitable that the capital intensive end of the business will have few players, who will demand higher returns on their long term investments, as of course is demonstrated by the price offered to edf for building new nuclear power stations.
I want to highlight Graham Evans’s post. Not only does it explain that riskier industries need to deliver bigger profits to make them worthwhile, but it also shows some specialist knowledge on the comparison of energy companies and supermarkets.
Clearly factors such as greed and exploitation have to be considered too, which is why Ed Davey is right to look into this.