Can someone explain again - how are energy companies make so much profit?

sevenhills

TheGardener said:

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.  

The price of gas went up because of the Ukraine war, but the price of other sources of energy also increased, electricity, wood and coal etc

MattMattMattUK

ProDave said:

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.

The reason that market that works is because different producers would not sell for less. Why would wind company sell for £100 per MWh when solar gets £200 gas gets £500 and coal gets £800? They would not, they would hold back and refuse to sell until they got price parity, so the market accepts that reality. No one is going to agree to a "sensible profit" because different people have different appetites for profit, different long term investment strategies, different re-investment strategies, different business models which reflect different gross and net positions etc. 

Where we have gone wrong compared to France as an example is that France has invested in and continues to invest in huge amounts of nuclear power, they have domestic energy production costs largely decoupled from international costs and it fully state owned (and was almost entirely state owned before the recent buyout). Compared to the USA etc. we lack the diversity of supply, as well as large domestic production of fossil fuels and produces more than we do (19%) of their domestic supply from nuclear. 

The way out of high energy prices is to build more domestic generation capacity, some renewables and large scale nuclear, of course that involves investment and the only realistic way to make that work is funded by government from increased taxes, so it will not happen because the British population continually vote to pay lower taxes. 

EssexHebridean

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? 

Not really - it shows that there are still an alarming number of people out there who believe what media headlines tell them, and also that we have a very irresponsible media circus who like a bit of clickbait - literal or metaphorical - and also know that telling "half a truth" is frequently the best way to rile people up. The likes of the Daily Fail make their business around telling people what they want to hear, to a large extent - whether that is anti-immigrant sentiment, or perpetuating falsehoods about the energy industry. There was recently a spate of articles from the BBC which repeatedly claimed that prepayment meters were always more expensive - something which simply isn't the case any more. (The "half truth" there is that for GAS - prepay IS more expensive - for electricity though it's frequently cheaper, and in some cases, a lot cheaper, at that!)

dunstonh

what I don't get is how come that profit doesn't flow down the line.

It does.   The shareholders see their share price increase and dividends improve.   Most people in the UK will hold shares in Centrica, either directly or indirectly.

There has also been a windfall tax on energy companies since May 22.  This is on top of the normal corporation tax rate.  In May 2022 it was 25% but increased to 35% in January 2023 and extended to 2028.

Companies can claim a credit of 91p for every pound invested back into the UK fossil fuel extraction.    An incentive to rebuild the dwindling UK industry which had been decimated due to a green agenda but left us at the mercy of global supply.

They also introduced a temporary 45% levy on low-carbon electricity generators.  This is somewhat ironic as these are the generators of tomorrow but they are also the biggest winners from the global rise in prices and are true windfall beneficiaries.

So, the profit does flow down the line.

Qyburn

MattMattMattUK said:

Why would wind company sell for £100 per MWh when solar gets £200 gas gets £500 and coal gets £800? They would not, they would hold back and refuse to sell until they got price parity

Wind farm operators can't "hold back". If they didn't like today's price they can't keep it to sell tomorrow. I think what actually happens is that producere are guaranteed that top price, as part of their licence agreement.

MattMattMattUK

Qyburn said:

MattMattMattUK said:

Why would wind company sell for £100 per MWh when solar gets £200 gas gets £500 and coal gets £800? They would not, they would hold back and refuse to sell until they got price parity

Wind farm operators can't "hold back". If they didn't like today's price they can't keep it to sell tomorrow. I think what actually happens is that producere are guaranteed that top price, as part of their licence agreement.

They can refuse to sell until they get the price they want to be paid though, it is of course a game of chicken, will they run out of money before someone else needs the electricity, but they could play the game.

[Deleted User]

It has just been confirmed on the 1pm News, if you didn’t know already, producers such as Shell; BP and Centrica are not allowed to use their profits to cross-subsidise consumer energy accounts. To do so, would break the UK’s Competition Laws.

EssexHebridean

[Deleted User] said:

It has just been confirmed on the 1pm News, if you didn’t know already, producers such as Shell; BP and Centrica are not allowed to use their profits to cross-subsidise consumer energy accounts. To do so, would break the UK’s Competition Laws.

Good grief - some accurate information on the news? Surely not?! 

sevenhills

[Deleted User] said:

It has just been confirmed on the 1pm News, if you didn’t know already, producers such as Shell; BP and Centrica are not allowed to use their profits to cross-subsidise consumer energy accounts. To do so, would break the UK’s Competition Laws.

But domestic and business energy prices are different, at least that is the implication from what I have seen in the media.
I understand that there is a cap on domestic, but not business.

ariarnia

sevenhills said:

Dolor said:

It has just been confirmed on the 1pm News, if you didn’t know already, producers such as Shell; BP and Centrica are not allowed to use their profits to cross-subsidise consumer energy accounts. To do so, would break the UK’s Competition Laws.

But domestic and business energy prices are different, at least that is the implication from what I have seen in the media.
I understand that there is a cap on domestic, but not business.

when dolor says 'consumer' the same rule applies for residential contracts and business contracts. 

shell global is not allowed to make a sweetheart deal with shell energy uk and the supplier (shell energy) has to pay the global market price as everyone else who wants to buy energy. 

if they manage to get a lot of people (residential or business) on fixes/contracts for more than they have to pay then they get profit but thats not really been possible at any scale for a year now.