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

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