Ben Chu: This energy debate has produced overpriced heat, but little reforming light

Outlook Multinational energy firm announces fat profits as pensioners freeze to death following an inflation-busting hike in fuel bills. It doesn't take a corporate public relations genius to spot that particular mantrap.

British Gas owner Centrica was duly in full-on damage limitation mode ahead of the annual results announcement, which showed a 14 per cent rise in operating profits. Sam Laidlaw was wafted across the media like a gust of heated air in order to explain why he is not, in fact, the boss of a gouging energy giant but the chief executive of a socially responsible enterprise that is selflessly devoted to keeping the lights turned on.

Mr Laidlaw made two points. First, British Gas's profit margins per household fell to £50, despite the 6 per cent price hike in November that provoked the wrath of customers. Second, Centrica needs to turn a healthy profit in order to be able to invest in new sources of energy production.

Neither is particularly convincing. The profits of British Gas's residential energy supply arm rose to £606m from £544m in 2011. Last year's price increases must, logically, account for a proportion of that growth. And investment to keep our lights on? That's a rather unfortunate claim given that Centrica this month pulled out of the UK nuclear industry. Moreover, the company has sufficient spare cash for a £500m share buyback. Equity repurchases are what companies tend to do when they don't know what to do with their cash, not when they're faced with a host of profitable investment opportunities. The Centrica dividend is also rising by 6 per cent.

The promise of energy privatisation in the late 1990s was that competition would work for consumers by exerting downward pressure on prices through the mechanism of competition between suppliers. Customer service would improve to boot. It hasn't worked out like that.

What we have, instead, is a rent-extracting oligopoly made up of six dominant players. Nine out of ten consumers never switch suppliers. It is an attachment born of confusion, rather than love. Suppliers deliberately make their bills complicated, and obfuscate their contracts to the extent that most of us don't even bother to hunt for a better deal.

The dodginess doesn't end there. The vertical integration of producers and distributors allows energy companies to make profits both upstream (wholesale) and downstream (distribution), insulating them from the need to focus on customer needs. The downstream operations also look murky. When wholesale prices rise, customers' bills quickly go up. When wholesale prices fall, customer bills are suspiciously sticky.

Mr Laidlaw is right on one point. It makes no sense to hold a public debate about an individual private company's profit margins, or to second-guess its investment decisions. Similarly, it can't make sense for David Cameron to announce new energy pricing regulation ad hoc from the floor of the House of Commons, as the Prime Minister did last year.

The Government and regulators should devote their energies, instead, to repairing the market structure of the sector and eliminating the abundant opportunities for rent extraction. The new proposed limitations on the array of tariffs offered are a good start.But the real challenge is opening up the market to new entrants and reversing the vertical integration that was foolishly waved through by the regulator a decade ago.

This market needs radical surgery if it is to be made to work for consumers. At the moment, we get a lot of overpriced heat from the political debate about soaring fuel bills. Time we had a little reforming light.

Start your day with The Independent, sign up for daily news emails
News
people
News
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
Sport
Sean Abbott
cricketSean Abbott is named Australia's young cricketer of the year
News
i100
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea