Puzzled by Profits

nheather

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers.

I understand the rise in the wholesale price and that this needs to be passed on to the consumer otherwise the energy provider will be making a loss - but if that is all they are doing, why is there an increase in profits.

Simply, I see it like this - the price we pay for energy units is made up of different parts such as

• wholesale price
• distribution costs
• running the business in general
• payroll
• the green levy (not sure I agree with this, but it’s there)
• the failed competitor levy (definitely don’t agree with this but it’s there)
• VAT

Clearly if wholesale price doubles then the overall price will increase a lot, VAT will also increase but the other elements should increase - maybe some general inflation in the running costs

For example, say a unit of electricity is 30p and 15p of that is the wholesale cost.  It rises to 20p so the total cost rises to 35p plus some extra VAT.  The consumers price rises understandably but that rise is passed onto the wholesale provider and HMRC.  The profit should remain the same.

In fact, if anything, as we are all trying to reduce our energy usage, the profits for energy providers should be reducing.

But that is not what is happening, we are seeing energy providers make huge increases in profit.  How is that happening - if all they are doing is passing on the increased wholesale prices as they claim then their profits should remain roughly the same.

BTW - I get how the energy generators (the wholesale providers) are making huge profits, what I’m talking about is the energy providers - the likes of Octopus.

macman

Where is your evidence of massive profits in the retail market? Under the price cap, profit is limited to 2%. So, under £40 per customer under the cap, and less for those still on cheap fixes.
29 providers have failed the last 12 months, which is hardly indicative of 'massive profits'.
Many providers sold cheap fixes without the resources to buy energy forward at a rate that would keep them solvent.
Only a fraction of the wholesale price increase has so far been passed onto the customer.

HappyHarry

Octopus Energy are not making any profit. 

From their latest accounts on Companies House, Octopus Energy had a turnover of £2bn and made a loss of £31.4m.

pochase

Only a few minutes old, the BG first half year profit is £ 98 Million

https://www.bbc.co.uk/news/business-62666221

Customer numbers are a bit confusing, they claim over 9 million homes, but only 7.26 customers.

In other words they are earning just over £2 per month per customer. 

QrizB

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers

...

what I’m talking about is the energy providers - the likes of Octopus

It's been reported by others on this forum that Octopus made a profit of £11 per customer last year.

£11 on an average bill of £1971 is 0.56%.

[Deleted User]

@macman is correct. The Ofgem Cap has until now been based on looking through the rear view mirror. Tomorrow’ s announcement includes an element of backwardation: a process that allows suppliers to recover some of the difference between the costs of buying energy and selling it. This would not be needed if suppliers were selling energy at a profit.  Ofgem is doing this to prevent further supplier failures. The Cap itself assumes a 2% profit margin.

I looked at the last published accounts for Octopus and Shell Retail last week. Octopus made a profit of £12.50 for each of its customers; however, Octopus is now a multi-national company partially owned by Tokyo Gas and it earns a lot of money by selling/leasing its Kraken billing system (to EDF; E.oN Next and others). Shell Retail which supplies energy to UK customers made a loss of £121M.

Hot Off The Press:

‘Shell has been fined more than £500,000 by regulator Ofgem for overcharging thousands of customers paying its default tariffs.

Shell Energy Retail, the oil giant’s consumer business, will pay £537,000 after a string of operational errors led to more than 11,000 households paying above the price cap between January 2019 and September 2022.

The total amount to be refunded to customers is 106,000, while Shell will also pay £400,000 to Ofgem’s voluntary consumer redress fund and £30,970 in goodwill payments to affected customers.’

Source: DT

MattMattMattUK

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers.

I understand the rise in the wholesale price and that this needs to be passed on to the consumer otherwise the energy provider will be making a loss - but if that is all they are doing, why is there an increase in profits.

Simply, I see it like this - the price we pay for energy units is made up of different parts such as

• wholesale price
• distribution costs
• running the business in general
• payroll
• the green levy (not sure I agree with this, but it’s there)
• the failed competitor levy (definitely don’t agree with this but it’s there)
• VAT

Clearly if wholesale price doubles then the overall price will increase a lot, VAT will also increase but the other elements should increase - maybe some general inflation in the running costs

For example, say a unit of electricity is 30p and 15p of that is the wholesale cost.  It rises to 20p so the total cost rises to 35p plus some extra VAT.  The consumers price rises understandably but that rise is passed onto the wholesale provider and HMRC.  The profit should remain the same.

In fact, if anything, as we are all trying to reduce our energy usage, the profits for energy providers should be reducing.

But that is not what is happening, we are seeing energy providers make huge increases in profit.  How is that happening - if all they are doing is passing on the increased wholesale prices as they claim then their profits should remain roughly the same.

BTW - I get how the energy generators (the wholesale providers) are making huge profits, what I’m talking about is the energy providers - the likes of Octopus.

Your basic premise is wrong, the suppliers are not making huge profits, most of them are operating around break even at the moment after 6-12 months of making a loss, there is a fairly high probability that they will fall back into loss making over the winter. 

Astria

QrizB said:

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers

...

what I’m talking about is the energy providers - the likes of Octopus

It's been reported by others on this forum that Octopus made a profit of £11 per customer last year.

£11 on an average bill of £1971 is 0.56%.

Yes, the reason Octopus actually make a half-decent profit half the time is because of their other business activities, such as their Kraken platform, which every supplier should use IMO.

MattMattMattUK

Astria said:

QrizB said:

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers

...

what I’m talking about is the energy providers - the likes of Octopus

It's been reported by others on this forum that Octopus made a profit of £11 per customer last year.

£11 on an average bill of £1971 is 0.56%.

Yes, the reason Octopus actually make a half-decent profit half the time is because of their other business activities, such as their Kraken platform, which every supplier should use IMO.

I think the majority of them are, BG are beginning the transition, EDF are transitioning next year. I think Octopus are a bit like Ocado in that respect, everyone thinks that they are an energy provider/food seller but in reality both are technology companies that happen to do something else.

Chrysalis

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers.

I understand the rise in the wholesale price and that this needs to be passed on to the consumer otherwise the energy provider will be making a loss - but if that is all they are doing, why is there an increase in profits.

Simply, I see it like this - the price we pay for energy units is made up of different parts such as

• wholesale price
• distribution costs
• running the business in general
• payroll
• the green levy (not sure I agree with this, but it’s there)
• the failed competitor levy (definitely don’t agree with this but it’s there)
• VAT

Clearly if wholesale price doubles then the overall price will increase a lot, VAT will also increase but the other elements should increase - maybe some general inflation in the running costs

For example, say a unit of electricity is 30p and 15p of that is the wholesale cost.  It rises to 20p so the total cost rises to 35p plus some extra VAT.  The consumers price rises understandably but that rise is passed onto the wholesale provider and HMRC.  The profit should remain the same.

In fact, if anything, as we are all trying to reduce our energy usage, the profits for energy providers should be reducing.

But that is not what is happening, we are seeing energy providers make huge increases in profit.  How is that happening - if all they are doing is passing on the increased wholesale prices as they claim then their profits should remain roughly the same.

BTW - I get how the energy generators (the wholesale providers) are making huge profits, what I’m talking about is the energy providers - the likes of Octopus.

They doing what is a common business practice.

Setup a separate company to isolate the divisions, then in cases like this the poor division can claim poverty (we barely make any profits gov) whilst its parent is making billions.  Works very well.

macman

Chrysalis said:

nheather said:

One thing that has been puzzling me is the massive profit increases being enjoyed by the energy providers.

I understand the rise in the wholesale price and that this needs to be passed on to the consumer otherwise the energy provider will be making a loss - but if that is all they are doing, why is there an increase in profits.

Simply, I see it like this - the price we pay for energy units is made up of different parts such as

• wholesale price
• distribution costs
• running the business in general
• payroll
• the green levy (not sure I agree with this, but it’s there)
• the failed competitor levy (definitely don’t agree with this but it’s there)
• VAT

Clearly if wholesale price doubles then the overall price will increase a lot, VAT will also increase but the other elements should increase - maybe some general inflation in the running costs

For example, say a unit of electricity is 30p and 15p of that is the wholesale cost.  It rises to 20p so the total cost rises to 35p plus some extra VAT.  The consumers price rises understandably but that rise is passed onto the wholesale provider and HMRC.  The profit should remain the same.

In fact, if anything, as we are all trying to reduce our energy usage, the profits for energy providers should be reducing.

But that is not what is happening, we are seeing energy providers make huge increases in profit.  How is that happening - if all they are doing is passing on the increased wholesale prices as they claim then their profits should remain roughly the same.

BTW - I get how the energy generators (the wholesale providers) are making huge profits, what I’m talking about is the energy providers - the likes of Octopus.

They doing what is a common business practice.

Setup a separate company to isolate the divisions, then in cases like this the poor division can claim poverty (we barely make any profits gov) whilst its parent is making billions.  Works very well.

You are ignoring the fact that the retail profit is strictly regulated at present to 2% under the price cap, and  that most of the surviving energy providers do not have other divisions who are producers. 
There are about 37 UK providers left, and I'd hazard a guess that no more than a quarter have producer divisions (e.g, Centrica, EDF etc). Maybe someone else can name them all?
The providers don't have to 'claim poverty' when 29 have already failed in the last year.