Labour’s Hypocrisy on Rising Energy Bills

If you go to the Labour Party’s website there is an announcement.

Clicking down will take you to energy price calculator. I found out with Ed’s policy I could save £112 per year.

Two weeks after the announcement, still no links to the actual plan, but there is a video to watch.

Just one minute and twenty-six seconds for a distinguished actor to say the following:-

How do you feel when you see your energy bill sitting at the front door and you know that it is going to be even higher than the last one?

And how do you feel when you read in the newspaper that your energy providers’ profits are up yet again?

Millions of ordinary families are struggling to keep up with bills. Bills that are rising faster than wages.

Since David Cameron became Prime Minister, he’s allowed gas and electricity to rise by an average of £300 a year and sat by as energy companies make record profits. Under this Government a privileged few come before hard-families. Ed Miliband and Labour are going to change that. Ed’s energy plan will mean a tough new regulator with the power to challenge the energy companies and keep prices down. Under Ed’s energy plan gas and electricity bills will be frozen. That’s right frozen. Under the Tories you have overpaid. Labour will fight the cost of living crisis and build an economy that works for working people.

The inference is that your bills are rising solely due to the ever-increasing profits of the energy companies. Further the nasty Tories had it in their power stop it. Along will come Labour and stop all that.

I have looked up the figures. Since the 2009, the energy regulator OFGEM has required the six big energy companies to produce financial data by five segments. That is for electricity generation, along with supply data for electricity and gas, each split between domestic and non-domestic supply. I have analysed all four years of data for the six companies, using links provided by OFGEM. There is, of course, no financial data available for 2013 as the year has yet to finish.

If Labour are correct in their inference of price rises being due to increasing profits then profits will be increasing as a percentage of sales. With the typical household’s bill rising by over 20% between May 2010 and the end of 2012, profits as a percentage of revenue would be rising sharply. The following shows the percentage components of revenue.

The narrow band in purple for profit increased from 1.8% of sales to 3.8%. It is not increasing profits that have caused the price rises. The reason for doubling is because, in total, the six major companies lost money on gas supply in 2009. Nor is there a sharp difference between domestic and non-domestic supply margins. You could claim that the energy companies are making more money on generation instead. They are not, as the full margins, by segment, by year, show below.

The total sales breakdown enhances the picture.

Although total are broadly the same in 2009 and 2012, revenue from domestic customers was 13%, whilst that from non-domestic customers was 17% lower. The reason Labour have a higher figure is they rely on OFGEM’s notional average user, who uses the same amount of energy year-in-year out. Real hard-working families have responded to rising prices by reducing consumption.

What is most important is why unit costs have risen. Labour are correct when they say it is not due to the wholesale price of energy. As already demonstrated, they are incorrect to say it is due to rising profits. The real reason is “other costs”. These rose from 32% to 40% of revenue in just four years. That is from £14.1bn to £17.7bn in just four years or a 25% increase. On declining volumes this is more significant for consumers.

These figures are corroborated by a breakdown by my energy supplier, Scottish Power.

With VAT at 5%, the Scottish power says that its charges to the domestic customer in 2013 are made up of 53% for fuel and 43% for other charges. This compares to the industry average in 2012 of 55.7% for fuel and 40.6% for “other costs” plus “amortization”. The higher proportion of other charges to domestic customers is to be expected, as small domestic customers have lower costs. The relevant domestic figures from the big six are 51.8% for fuel and 44.0% for other charges. Given the obviously rounded Scottish Power figures, they are remarkably close to the industry average.

The supply market is fiercely competitive, hence the real reason for the ability of customers to save money by switching suppliers. Therefore it is doubtful that internal costs will have risen. What has risen is the delivery of the energy to the home (National Grid, local delivery, and cost of meters), along with green levies. So it is likely over 75% of the price increases to the customer are due to factors outside of the energy supplier’s control.

Where does responsibility lie for the above-inflation price increases?

The dash for “clean” energy to save the planet is enshrined in the Climate Change Act 2008. It was pushed through the House of Commons when Ed Miliband was Environment Secretary. This accelerated the growth in green levies and the requirement for a more extensive grid network to carry the wind-generated electricity from remote turbines. Delve further in the profits on electricity generation and you will find that fossil fuel generation has margins of 10%. A price freeze will eliminate the supply profits in six months, and the generation profits in two years. The is a sure way to get a near monopoly in gas supply, and cause the rapid shut-down of three-quarters of generating capacity. It is an act of gross hypocrisy by Ed Miliband to threaten to destroy a competitive industry to remedy a problem that he is responsible for.

 

NB First time comments are moderated. The comments can be used as a point of contact.

Kevin Marshall

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12 Comments

  1. Phil Franklin

     /  December 18, 2013

    A question, Kevin: Do you have numbers for the National Grid? One assumes they are a separate company providing the big six with their connections, so I wonder what their costs/profit lines are like.

    Reply
    • manicbeancounter

       /  December 18, 2013

      I did start looking at the National Grid figures. They are online. There are quite complex due to the various regulated functions the business carries out both here and in the States.
      However, even if profit growth can partially account for the cost growth, a price freeze is the wrong policy.
      The detail should be provided by OFGEM. They have provided an approximate split of costs on a factsheet (No.98?), but only proportions at a given point in time. What is needed is the change over time of the various cost components, along with modelled projections for the next few years.

      Reply
  2. The global price of coal is said to have dropped by 30% over the last five years. Considering that 40% of our electricity is still generated by coal, has this kept down the price of electricity and masked what would have been a higher increase in that period?

    On a point of information, Ed Miliband was the Secretary of State for Energy and Climate Change, not Environment Secretary, for the CC Act.

    Reply
    • manicbeancounter

       /  December 18, 2013

      The coal price does not appear to have affected wholesale prices. The whole thrust of Labour’s “hidden” analysis was to point to how wholesale prices were static, and energy prices have gone up.
      http://manicbeancounter.com/2013/12/03/notes-labours-analysis-of-the-energy-market/
      Lower coal prices may not lead to lower prices at present, as they are but one of a number of factors affecting wholesale prices. In particular, if coal turned out to be the cheapest form of electricity, it would not be allowed to obtain a larger share of the market. Instead there would be just larger profits from coal-fired power stations. At the same time, renewable energy is given first preference, so there is no downward pressure on prices from there.

      Reply
    • manicbeancounter

       /  December 19, 2013

      You are right about Ed Miliband being Secretary of State for Energy and Climate Change at the time of the Act. I thought the Act gave him the title, along with more personal powers than possibly any other Cabinet member, bar the Prime Minister. It is worth reading.
      http://www.legislation.gov.uk/ukpga/2008/27/pdfs/ukpga_20080027_en.pdf

      Reply
      • Brian H

         /  December 20, 2013

        What does “I thought the Act him the title” mean?

      • manicbeancounter

         /  December 21, 2013

        It means my grammar is as bad as ever.
        Have stuck a “gave” in the sentence, which might give it a little more sense.

  3. Peter Stallwood

     /  December 19, 2013

    I have just come across your blog but am having great difficulty in reading it as the text merges with the background pictures. The pictures are pretty but could they be changed to increase the contrast between text and background?

    Thanks.

    Reply
  4. John

     /  December 29, 2013

    The supplying companies are also the generating companies; they buy the ‘energy’ from themselves and sell it onto consumers ? What are the “other costs” ?
    And there is NO JUSTIFICATION FOR THE PAYMENT OF GROSSLY EXCESSIVE BONUSES.

    Reply
    • manicbeancounter

       /  December 30, 2013

      If you follow OFGEM link and look at the profit levels for energy generation, then you will find that profits have increased – but only in line with total sales. Profits as percentage of sales have not changed, so the structure of the market is not to blame for the rise in energy costs.
      The “other costs” on energy supply have increased by £3.6bn in just four years. It is not clear exactly what they are – although I have tried to show that the energy companies are not to blame. I would be surprised if “grossly excessive bonuses” are a significant factor in the other costs. It would be a big story if the directors of the energy companies had increased their bonuses by tens or hundreds of millions of pounds a year. However, the report and accounts of the six major companies are online (with directors remuneration), so you are welcome to show how they have influenced the other costs. I will post up any analysis that you send me – and will try to put it in the context of overall rising energy costs.

      Reply
  1. Creating a (Financial) Carbon Budget for the UK Climate Change Act 2008 | ManicBeancounter
  2. 10GW of extra offshore wind turbines by 2020 – The Real Costs | ManicBeancounter

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