Energy Firms making bigger AND smaller profits

We have heard a lot recently about how rising electricity and gas prices are a result of the large profits of the energy companies. Ed Milliband went on the attack at the Labour Party Conference, proposing a price freeze if Labour gets into power. With energy prices going up 10% a year I wandered how large these profits must be. The BBC today gives some clues.

Regulator Ofgem says the big six energy suppliers saw profit margins in the supply of gas and electricity rise to 4.3% in 2012, up from 2.8% in 2011.

And the watchdog says supplier profit per household customer rose to £53 last year, from £30 a year earlier.

However, the power generation profit margins at the firms fell from 24% in 2011 to 20% in 2012.

Overall, profits in generation and supply across the half-dozen firms fell from £3.9bn in 2011 to £3.7bn in 2012.

So the retail profits have increased, but the overall profits have decreased. This is despite turnover having increased due a large hike in prices. It is a incorrect to say that the double-digit price increases paid for larger profits of the big six energy suppliers. The following tries to explain why.

Ofgem has not uploaded this latest data to its website, so I have to piece together from what is available. Factsheet 118 details the comparison of 2011 with 2010. It says


•     the average profit margin across all six suppliers for

supplying gas and electricity to homes and businesses

declined from 3.8 per cent in 2010 to 3.1 per cent in


•     the margins in generation, however, increased from

18.4 per cent in 2010 to 24.4 per cent in 2011. This is

because of higher wholesale electricity prices. Typical

generation margins also tend to be higher than in supply

to finance the capital investment needed to build power


A summary of these figures is below

In other words, there is mostly an about face from the very profitable 2011, but still much higher profits than in 2010.

Given that the profits from power generation are much higher, we need to look at this more closely. What should be recognized is the relevant rate of return generation is not ROS (Return on Sales), but ROCE (Return on Capital Employed). An indicator of this can be gleaned from Ofgem’s summaries of the major’s accounts for 2011.

For example, Scottish power has two power sectors. In 2011 it had an EBIT of 168.5 on sales of 1677.0 on “generation” and EBIT of 91.0 on sales of 172.0 on “renewables”. So the older generation has a ROS of just 10%, and the newer, cleaner, renewables a ROS of 53%. To some extent this is not surprising. Renewables – mostly wind turbines – require a huge upfront capital investment, but low operating costs. Also, the renewables capital stock is much newer. But an additional figure is also revealing – the terra-watt hours sold. The “generation” produces £82.60m/TWh, whilst “renewables” produces £101.20m/TWh.

The only other producer to give a split of energy generation is EDF energy, only this time between nuclear and non-nuclear. For nuclear power, the ROS is 40% and £48m/TWh, and for non-nuclear power, the ROS is 10% and £47m/TWh. With Hinckley C, the guaranteed index-linked rate is a minimum £92.50m/TWh.


  1. The large profits are in power generation.
  2. The profits in terms of ROS will increase with new investments, even if ROCE stays the same.
  3. The profits in terms of ROS will additionally increase with the investment in renewables and nuclear, even if ROCE stays the same as initial outlay per unit of electricity is much higher, and the operating costs are tiny, when compared with a coal or gas-fired power stations.
  4. Higher capital investment will mean above-inflation rises in headline profits and ROS, even if the proper measure of profit for generation – ROCE – stays the same.
  5. The responsibility for the Climate Change Act 2008, that generates the higher ROS figures (and much more expensive electricity) is primarily due to the last Labour Government. It was steered through by the then Environment Secretary Ed Miliband. To freeze retail prices will reduce the ROCE of the energy companies, giving a clear signal not to invest in the power generating capacity to stop the lights going out. If you want lower prices and profits, then have a truly liberalized market with fossil fuels given equal status.

Kevin Marshall


Lewandowsky’s false inference from an absurd correlation

Steve McIntyre has posted a number of instances where Stephan Lewandowsky has reported correlations for which there is little or no evidence. My comment is

Even more bizarre than absurd correlations, is to draw inferences of cause and effect from correlations, when there are a huge number of equally valid (or invalid) inferences that can be made.

The title of the Hoax paper is “NASA faked the moon landing|Therefore (Climate) Science is a Hoax: An Anatomy of the Motivated Rejection of Science“. The first part implies that, due to coming to believe that the moon landing was faked, survey respondents reasoned that climate science was also a hoax. But, given that this survey was only on climate blogs, is it not more likely that the respondent’s rejection of “official” or orthodox version of events goes the other way?

Looking at the data there is a similar issue of low numbers on support of the paired statements. Only 10/1145 supported CYMoon. Of these only 3 supported CYClimChange. Of these only 2 scored “4” for both. And these were the two faked/scam/rogue respondents 860 & 889 whose support of every conspiracy theory underpinned many of the correlations. The third, 963, also supported every conspiracy theory. Let us assume that they are genuine believers in all the conspiracy theories. Further, let us assume that one of the 13 conspiracies in the survey did trigger a response of the form “because I now know A was a conspiracy, I now believe B is a conspiracy”. There are 2n(n-1)= 312 possible versions of this statement. Or, more likely, no such reasoning process went through any respondent’s mind at all. Given the question was never asked, and there is no supporting evidence for the statement “NASA faked the moon landing|Therefore (Climate) Science is a Hoax” it most likely a figment of someone’s imagination.

Data in support of this statement

In the survey the answer 1 was a strong rejection, 4 a strong support. Out of 1145 responses, only 6 strongly supported the “NASA faked the Moon Landing” hypothesis, and a further 4 lent support to it. Of these 10, only 3 support the “Climate Change is a Hoax” statement.

The strong support for conspiracy theories is shown by giving the average score of respondents over all 13 conspiracy questions. The 3 that supported by CYMoon and CYClimChange had the highest average scores of all 1145 respondents.

Stephan Lewandowsky – a self-confessed danger to democracy

Australian Climate Madness takes a swipe at Stephan Lewandowsky’s latest taxpayer-funded polemic. This is an extended version of my comment.

Lewandowsky’s sneaky request “to mention only my assistant’s name, Charles Hanich, on the online survey” has particular relevance to what followed. Before Joanne Nova published her “Lewandowsky show skeptics are nutters… post, she contacted a number of skeptic bloggers to search their inbox for Lewandowsky’s survey. There was no mention of his research assistant in the paper, so naturally all the resultant searches drew a blank. On this basis I wrote on 03.09.12:-

The claim in the paper that they contacted five sceptical blogs to improve the spread of views is highly suspect.

It turns out that my suspicions were correct. Stephen Lewandowsky had not contacted any of the skeptic sites, and deliberately kept people in the dark as to this fact.

Lewandowsky posted on 10.09.12 at Shaping Tomorrow’s World

1. When will an apology be forthcoming for the accusations launched against me? And how many individuals should now be issuing a public apology?

To explore the magnitude of this question we must take stock of public statements that have been made about my research. For example, one blogger considered it “highly suspect” whether I had contacted any “skeptic” sites. (emphasis mine)

Linking to my comment, Prof. Lewandowsky, knowing my suspicions to be true, brazenly demands that I apologize for daring to suspect him.

He digs himself a deeper hole by saying later

we now know that the presumed lack of evidence was actually evidence for a measure of carelessness or shoddy record keeping among the individuals contacted.

It gets worse. Prof Lewandowsky co-wrote with John Cook a short pamphlet called The Debunking Handbook.

It’s self-evident that democratic societies should base their decisions on accurate information. On many issues, however, misinformation can become entrenched in parts of the community, particularly when vested interests are involved. Reducing the influence of misinformation is a difficult and complex challenge.

What Lewandowsky engaged in was misinformation. He asked to keep secret his identity, gave obscure (or non-existent) clues to emails and then claimed bloggers “amnesia” when they failed to find emails sent to them by unidentified individual. He did this whilst believing that such misinformation would work to the advantage of himself and his unsupported beliefs, whilst undermining democracy.

He later went onto attack my simple analysis using pivot tables. Yet such analysis revealed much the LOG12 paper omitted. For example

– how few skeptic responses there were (c.15%)

– how few supported many of the conspiracy theories (e.g. Moon landing hoax = 10/1145, AIDS created by US Govt = 9/1145)

– That key to the higher proportion of skeptics supporting conspiracy theories were two rogue responses.

The whole paper is misinformation, aimed at getting an alleged majority to discriminate against those who have alternative points of view. Lack of any counter-balance is the major factor that makes people vulnerable to misinformation. Further research on belief in conspiracy theories would reveal that they are more predominant in communities where there are strong belief systems with enforced dominance.

Kevin Marshall

Anyone who wishes to contact me can do so through the comments. I will not publish any such request made in a non-threatening fashion. I will publish counter-arguments, so that others might compare and contrast for themselves.