British Gas has behaved disgracefully towards energy customers who have fallen into arrears, sending agents to break into their homes and install prepayment meters – activities for which the company deserves to be ordered to pay millions of pounds in compensation. Meanwhile, Centrica, the owner of British Gas, has just reported full-year profits of £3.3 billion, more than three times that it made in the previous year.
Both are true, yet that doesn’t mean they are connected. When you drill down into Centrica’s profits you find that the vast majority are being made in the upstream part of the business – producing oil and gas – and in trading in the wholesale market. Only £72 million of those profits were derived from the retail side of the business, selling gas and electricity to consumers. Given that British Gas has 7.5 million domestic customers, it works out at just under a tenner per household. As for installing and servicing boilers, that side of the business lost £9 million.
It is wrong to suggest that Centrica’s upstream profits have been made on the backs of UK consumers
The retail energy market is a pretty rotten place to be – contrary to popular belief that energy companies are ripping us off left, right and centre. If they were, then half of them wouldn’t have gone bust, or withdrawn from the market, in the past couple of years. It is a business of thin margins and endless hassle from regulators and consumer groups (although disgracefully late in the case of Ofgem’s failure to pick up on what British Gas was doing before a piece of investigative journalism by the Times). Retail energy forms have turned to heavy-handed debt-collection practices in order to try to stay in business – although there is no excuse in Centrica’s case because it can prop up its retail side from its wholesale profits.
Drilling for gas and oil, well that is another matter – or at least it has been for the past year. A spike in global energy prices has produced riches, more than making up for sharp losses in 2020 when the pandemic led to a collapse in demand for energy. That is how markets work: oil and gas companies keep going through the lean times so that they can make money during the good times.
Oil and gas production is a global business, so it is quite wrong to suggest that Centrica’s upstream profits have been made on the backs of UK consumers. Those on the left who are in the habit of attacking any company for the evil act of making a profit forget that a lot of these profits will be flowing into the pockets of many UK pensioners of very modest means – and who certainly haven’t enjoyed much in the way of dividends out of Centrica in recent years.
But there is one aspect of the UK energy market which is leading to unnecessarily high prices for electricity consumers: marginal pricing in the wholesale market. Under the rules of market created at privatisation, any generating company supplying power into the grid at any one time is paid the same rate: the rate charged by the highest-cost producer. What happens then is this: wind and solar energy drop away, resulting in shortage of supply. Owners of coal or gas-powered stations, or of energy storage facilities, then have to be bribed a huge sum to switch on their idle plant for a few hours in order to fill the gap in power. Even if they are contributing a mere megawatt, everyone supplying power at that moment is rewarded at the same rate. That has led to huge windfall profits, not just for gas plants but for many wind and solar farms, too.
That isn’t a free market; it is a phoney one dreamed up by state regulators. Government would do better reforming that before loading energy companies with yet more windfall taxes.
Not Zero: How an Irrational Target Will Impoverish You, Help China (and Won’t Even Save the Planet) by Ross Clark is published by Forum Press
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