Price row over record profits at British Gas
Calls for price cuts as profits soar 58 per cent at Centrica's retail division
Friday 26 February 2010
British Gas was last night defending itself against a barrage of calls for further price cuts after record profits led to charges that energy companies are "out of control".
Yesterday's annual results showing British Gas spiking 58 per cent to a record £595m, despite a 7 per cent fall in consumption, sparked outrage from consumer groups.
The revelation came just days after industry regulator Ofgem accused the so-called "big six" energy companies of earning an average 40 per cent more in profits per household over this winter, as net margins soared from £75 per customer to £105.
Government-backed watchdog Consumer Focus was yesterday calling for "immediate and significant price cuts" from both British Gas and its competitors. "Energy companies have no excuses for not cutting bills," Philip Cullum, the deputy chief executive, said. "It is clear the problems in the energy market are profound and that it requires fundamental reform."
Simon Hughes, the Liberal Democrat Energy spokesman, said: "These massive profits show that the energy companies are out of control and their regulator is out of action."
In its defence, Centrica stressed that British Gas has cut its prices three times over the past year. Its retail business cut its prices by 7 per cent earlier this month. Not only is it now the cheapest of all the UK's energy suppliers, but it has added another 141,000 residential customers in the last 12 months, taking the total to 15.7 million.
The company also emphasised yesterday that the high profits from its retail division were not the whole story. The group's power generation business also saw a major boost – rocketing up from £11m to £147m – as falling gas prices made its gas power stations more competitive against coal-fired rivals. But the same low prices sent operating profits at the company's oil and gas production business crashing by 62 per cent.
The company's North American business also saw profits down by 29 per cent to £153m, thanks to tough economic conditions and a one-off £61m charge from its residential business. Taken together, Centrica's group revenues grew by 5 per cent to £22bn but adjusted operating profits fell by 7 per cent to £1.86bn.
Chief executive Sam Laidlaw also defended his company's profit margins, which were coming in for particular flak. Over the year as a whole, margins were 7.6 per cent, not far from the 6-7 per cent target range. But in the second half, they jumped to 8.7 per cent, fuelling claims that prices should have been cut both earlier and lower.
"The reality is that a 7.6 per cent margin is not an exceptional return," Mr Laidlaw said. "This is a business with big working capital and capital requirements, where we have to produce gas in hostile environments, ship it across the world, liquefy it and transport it to customers' homes, and our margins are low compared with BT's 15 per cent or the 8.5 per cent at Marks & Spencer."
The group also has massive investment commitments as it attempts to expand its upstream business to shield itself from the price volatility in the open market, Mr Laidlaw said.
Last year the group upped its UK oil and gas reserves by 50 per cent with the purchase of Venture Production, and spent £3bn buying a 20 per cent stake in nuclear giant British Energy. It is also investing in wind energy and gas storage facilities. "At the end of the day, these profits go on ensuring that we keep the lights on," Mr Laidlaw said.
Some commentators say the issue is not British Gas, but its rivals. Joe Malinowski, the founder of the price comparison website TheEnergyShop.com, said: "It is unfair to be too critical of British Gas given its recent record of price cuts. The real question is, why are the other energy suppliers not cutting their standard energy prices?"
Alongside yesterday's results, Centrica announced it is hiring 1,100 people in its insulation business and buying gas assets in Trinidad and Tobago to take it into LNG for the first time.
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