Are we being ripped off...again?

mech_2

Bark01 wrote: »

Hi Drooke,

Although energy prices have come down what people don't realise is that gas and electric are brought in bulk by the energy suppliers months and even years in advance.

Unfortunately this argument won't work any more. The prices have been too low for too long. Now I have only looked closely at the prices for gas, not electricity, but gas peaked a year ago. I have yet to see any evidence that any significant quantity of gas is bought more than a year ahead in the UK market.

Assuming an evenly distributed one-year hedging model (as Ofgem did in their analysis based on information from within the industry) the peaks and troughs in the retail price should lag behind the wholesale price by six months (the mid-point). Six months ago the wholesale gas price was already below what it was 18 months ago, so the large price rises of a year ago should be being reversed by now.

Unfortuantly most of the UK suppliers brought a lot of gas at the wrong end of the market. So even though the wholesale prices have fallen they are stuck with a lot of expensive old power and not much room to buy up the cheap energy that is on the market today.

Another big issue is the amount of debt that uk consumers have run up with energy companies, the size of this debt means that prices need to stay higher than would be if everyone paid their bill. You also need to factor in the recent rises in extra costs to suppliers of increased social obligations such as CERT.

It may supprise many people to know but utility companies are not in general making any money out of the UK retail market.

British Gas' results released in July don't fit with that.

Here is a quote from E.on on the subject

EON has stated that bad debts in the UK are running at the level of “hundreds of millions of pounds”, and that Ofgem needs to take this into account when making statements on current retail energy pricing an EON spokesman added that “we have not made a profit in the UK retail market since 2006. We will not make a profit this year.”

So EON are doing something wrong. This doesn't mean utility companies "in general" are not making a profit.

Your quote comes from a Times article which I can also quote:

The wholesale price collapse is rewarding some utilities with record profit margins.

http://business.timesonline.co.uk/tol/business/industry_sectors/utilities/article6823986.ece

Bark01

A few points in answer to the above.

No one seems to have commented on the amount of bad debt there is in the industry which keeps prices inflated.

I said that supppliers don't make mcuh money out of there retail business. What I meant by this was the selling of energy to the residential market. There are profit margins top be made in enrgy production, storage and networks but OFGEM wants these be run as seperate business parts.

My information comes from Nomura not from newspapers.

1carminestocky

There's bad debt in most industries. The energy industries are somewhat luckier than some other industries in this regard because the punter with the debt 9unless they have done a moonlight flit) will still need the ESSENTIAL SERVICE the company is supplying so can therefore be placed on a pre-payment meter which more or less ensures the debt gets paid (and, until vey recently, also ensured the fuel he/she was subsequently using was being supllied at absolute top dollar).

If Eon really are struggling why don't they just sell up? Surely a lot more positive than moaning about it. They won't sell up because they are actually coining it in. Whether that's from exploration/wholesaling or retailing tends to alternate from year to year.

mech_2

Bark01 wrote: »

A few points in answer to the above.

No one seems to have commented on the amount of bad debt there is in the industry which keeps prices inflated.

I know it's fashionable to blame bad debts for everything these days, but you really need to cite some kind of source. The Times article suggests it's industrial customers defaulting. But British Gas' business energy division still managed to turn a healthy profit in the first half of this year, so either EON are very bad at recovering debts or the whole story is BS. I prefer the latter explanation.

I said that supppliers don't make mcuh money out of there retail business. What I meant by this was the selling of energy to the residential market. There are profit margins top be made in enrgy production, storage and networks but OFGEM wants these be run as seperate business parts.

Yes, which makes it especially easy to see that British Gas Residential operated in this market with bumper margins in the first half of this year and the wholesale prices have only gone down since. See here: http://www.centrica.co.uk/files/results/interim09/Performance_Indicators_Interim09.xls

My information comes from Nomura not from newspapers.

It seems to have come from the Times article I linked to before. Presumably they phoned up various utility companies without saying they were from a newspaper and just reported whatever fob-offs they were given. This is why you can't rely on newspapers for information and neither should Nomura.

EON did make a profit in the UK last year, I checked. 922 million before tax. The quote is BS.

1carminestocky

Nice to see you've come round to my way of thinking, mech And to think I got labelled a troll for suggesting, many moons ago, the energy suppliers are rip-off merchants. They are. Aren't they?

Perelandra

From these numbers you can see how accurate you need to be on pricing, and how fine the line is between making a loss and ripping customers off:

Average revenue per account H1: £280
Average profit per account in H1: £ 19

If BG had reduced its prices, so that each customer had paid on average £10 less in H1, would you feel that you were no longer being "ripped off"? Probably not... I doubt a £10 (or £20 annualised) figure would be enough to even make you change suppliers. But that small change would halve the retail business's profits.

The pricing needs to be very, very accurate in order to earn "normal" profit. Get it slightly wrong, and you either make a loss, or "too much" profit.

Dave_save

The problem with utility company pricing is that there's no incentive to keep prices down. OFGEM was put in place to ensure an element of competition existed to make these companies work to obtain better deals for consumers. When prices go up they blame the Russians, and when prices drop by a fraction of the wholesale price reduction, it's because they've worked hard to get a better deal.. as if!!

Utility companies nowadays are no better than middle men or agents selling on an 'invisible' product, especially when you see some of the activities of their salesmen, and the lies they tell.

mech_2

Perelandra wrote: »

From these numbers you can see how accurate you need to be on pricing, and how fine the line is between making a loss and ripping customers off:

Average revenue per account H1: £280
Average profit per account in H1: £ 19

If BG had reduced its prices, so that each customer had paid on average £10 less in H1, would you feel that you were no longer being "ripped off"? Probably not... I doubt a £10 (or £20 annualised) figure would be enough to even make you change suppliers. But that small change would halve the retail business's profits.

£40 annualised for most I suspect, as they are likely to be duel fuel customers. I have just switched for a £57 saving which isn't a lot more.

It is irrelevant anyway. I referenced Centrica's results to show that even British gas who had the cheapest tariff for many last winter, who dropped their prices first and by a relatively generous amount, still managed to increase their profit 80% on the same period the year before. Therefore the claim that EON can't turn a profit is not credible.

The pricing needs to be very, very accurate in order to earn "normal" profit. Get it slightly wrong, and you either make a loss, or "too much" profit.

I'm not too bothered by their H1 2009 profit levels now, it's water under the bridge. I just don't think people should underestimate the potential for price cuts. Margins could easily be 60% higher this winter unless there are further price reductions.

Perelandra

mech wrote: »

£40 annualised for most I suspect, as they are likely to be duel fuel customers. I have just switched for a £57 saving which isn't a lot more.

Fair point.

mech wrote: »

It is irrelevant anyway. I referenced Centrica's results to show that even British gas who had the cheapest tariff for many last winter, who dropped their prices first and by a relatively generous amount, still managed to increase their profit 80% on the same period the year before. Therefore the claim that EON can't turn a profit is not credible.

The point I was trying to make, albeit badly, is that if Eon had made a decision which was only slightly worse than BG's, then the profit that BG had made could easily have turned into a loss for Eon. Very careless, but I can see how it could happen.

mech wrote: »

I'm not too bothered by their H1 2009 profit levels now, it's water under the bridge. I just don't think people should underestimate the potential for price cuts. Margins could easily be 60% higher this winter unless there are further price reductions.

But if the costs stayed exactly the same as they had been in H1, the amount of price cut possible would still be very small, otherwise profit for 2009 could easily be 50% of 2008. There's a fine, fine line between profit and loss.

mech_2

Perelandra wrote: »

The point I was trying to make, albeit badly, is that if Eon had made a decision which was only slightly worse than BG's, then the profit that BG had made could easily have turned into a loss for Eon. Very careless, but I can see how it could happen.

For 3 years running? I'm not convinced. The timescales are long. Energy contracts are agreed in advance, so they have a good idea what it is going to cost them before they set the retail prices. Hedging spreads their risk. All the big suppliers have multiple tariffs they can alter or replace to control pricing more finely than doing it all in one go.

But if the costs stayed exactly the same as they had been in H1, the amount of price cut possible would still be very small, otherwise profit for 2009 could easily be 50% of 2008. There's a fine, fine line between profit and loss.

But that's the point. The costs haven't stayed the same.