Can someone explain again - how are energy companies make so much profit? 16 February at 8:02AM in Energy 68 replies 2.1K views

TheGardener

So Centrica made 3.3bn - I don't understand. If they are paying so much for the gas that in turn is crucifying many of us - how are all the energy companies making so much profit? 

Mstty

You are mixing up mining/production of energy with supply of energy.

The companies making billions are the mining/producing companies(worldwide companies) The suppliers of energy are regulated in the UK and allowed to make a maximum of 2% profit.

pochase

Centrica is not an energy supplier, BG is. BG is a part of the Centrica group, but an independant company with their own profit and loss.

Energy suppliers have a 2% profit worked into the cap rates for the SVT, they can a higher profit for example from fixed tariffs or like Octopus from licensing their billing system to other suppliers.

Reality is that many if not most suppliers have made losses over the last two years.

Shell as energy supplier might leave the market because they are making losses for the last years, evem so the Shell as producer earns money.

They producer will sell the energy at market price, they will not sell it cheaper to suppliers in their group.

This is been explained every month several times, 

Dolor

Simple. We live in a global market and the market sets the prices that oil/gas producers get for the energy that they extract. Companies such as BP; Shell and Centrica will sell their product to the highest bidder. If the UK was to say that we will pay you £0.0x per kWh for gas, then the producers will just sell their products to other markets. 

I should add that oil and gas are no different from wheat or fertiliser. The market decides the wholesale price based on supply and global demand.

Clearly, the Uk Government could choose to impose, say, a 95% tax on a producer’s profits. The effect of this would be that producers would no longer invest in the UK as it would deemed to be an unprofitable venture.

TheGardener

@pochase well, I'm sorry for being so dim - the fact it has been explained so many times kind of shows the scale of the dismay don't you think? I am well aware that there is a difference been the energy suppliers and the producers - and well aware of the restrictions placed on the suppliers but what I don't get is how come that profit doesn't flow down the line. I can't be alone in thinking the system is broken if the producers can make such massive gains at the expense of their market? 

daveyjp

Because Centrica provide a primary product i.e.the gas.

They drill for gas and it costs £10 to get out of the ground.

The market buys that from them and other suppliers for £20. Profit £10.

There's an invasion and a major supplier of that product (Russia) can no longer sell to as many customers.

The market needs to provide the product, there is less of it,  market price goes up to £40.

Centrica now make £30 profit by doing nothing as it still costs £10 to get it out of the ground.

British Gas (part of Centrica) were buying it at £20 and selling to domestic customers.  They now have to pay £40 for the same amount and this is passed to customers.

sevenhills

Centrica are an international company, only 5% of their profits are made in the UK.
Tesco are mostly UK based, but I believe they also have an an international element. They doubled their profits, although trading is difficult.

Tesco are the UKs third largest company.

https://www.theguardian.com/business/2022/apr/13/tesco-profits-double-but-supermarket-warns-of-impact-of-soaring-inflation

TheGardener

I know my grasp of market economics is only basic but  - if Tesco decided to quadruple all their prices - the 'market' would go elsewhere (Sainsbury's, Aldi etc) With energy, the market can't do that and we appear to have a virtual monopoly system with a 'we say - you pay'  set up. 
The other thing about free market economies is that eventually, prices should settle but these days once a price has gone up - it never truly comes down again whatever the market pressures.  

ariarnia

TheGardener said:

@pochase well, I'm sorry for being so dim - the fact it has been explained so many times kind of shows the scale of the dismay don't you think? I am well aware that there is a difference been the energy suppliers and the producers - and well aware of the restrictions placed on the suppliers but what I don't get is how come that profit doesn't flow down the line. I can't be alone in thinking the system is broken if the producers can make such massive gains at the expense of their market? 

two of the big things in energy is opec+ (Organization of the Petroleum Exporting Countries) and when you want your energy delivered. 

if you want to buy oil or gas for tomorrow/soon you can get it cheaper and then make more of a profit (which is the model lots of companies relied on and why they went bust or really struggled when prices first started to go crazy). if you want to buy your energy for in 12 months or longer (fix the price now so you know what you can sell at) then it will cost whatever the price is but that normally means your limited to the 2% because thats how ofgem works it out. you could have made lots of cash when the problems happened if you had bought below the new cap rates (the same as anyone who was lucky enough to start a long fix this time last year).

playing the market like that is how traditionally the 'profit flowed down the line' because it let energy suppliers offer cheap fixes below the cap rate. its just not possible right now with the cap being below the market price for so long (it might be in the next 6-12 months if the forecasts are right and prices drop below the cap). 

the other part is opec. which is a core of 13 contries (then russia who is or isnt depending on if the rest do what they want) who get together and decide what price the oil they export should be sold at.

they can keep the price high by producing less (to a point as you can't completely stop) and even tho they dont control 100% of the market because theres not much alternative that inflates the prices of the rest. supply and demand.   

you might find this interesting https://en.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arabia_oil_price_war

MWT

TheGardener said:

The other thing about free market economies is that eventually, prices should settle but these days once a price has gone up - it never truly comes down again whatever the market pressures.  

That isn't true, right now you can see that day-ahead prices for energy are lower, and with tariffs like 'Tracker' from Octopus you can benefit from that as a consumer.

It is all about risk management for the energy suppliers, and that has a price when buying forward, but if you are prepared to be a bit more engaged in monitoring your energy tariffs then there are options that are delivering prices below the cap, but on variable rates, the days of long fixes have gone for now.

ProDave

The market is bonkers.  Wholesale electricity is priced on the most expensive way of making electricity, from gas.  All the suppliers that can make electricity cheaper than from gas, get paid the same, so make bigger profits.  When the gas price goes up they make even bigger profits.

You might argue we should have a different market mechanism where they only ever sell at cost plus a sensible profit, so then each electricity generator would charge a different price and the average price paid would be lower.  But that is not the market we have. So blame those that set the way the market works, not those that whether they like it or not, profit from the higher prices.