Thursday, 28 July 2011

British Gas and a worrying trend

You may well have already heard, British Gas and their parent company, Centrica, have posted some profit numbers and they're "disappointing" for the company. £1.3bn profits, a 19% drop in profits, is seemingly not good enough news during times when wholesale energy prices are rocketing and the economy is stagnating. British Gas itself seems to have taken the brunt of the "loss" with an over 50% drop in their operating profits to £270m.

As Ben Goldacre here says... the reporting is lax, there is no context. £1.3bn is huge, but it's especially huge if the company was only taking, say, £1.4bn in turnover. The reality is that their revenue was £11.5bn, a margin of around 13%. I have no figures to back this up, but an anecdotal search shows this is about "normal" for the energy industry, as far as profit margins go...maybe even "good". In the solely British Gas court, the first half of 2011 residential revenues are £4bn, which paint it as a particularly weak arm of Centrica this first half of 2011.

But shouldn't we have more context? By allowing the press release to essentially be regurgitated we're forgetting the history of how British Gas got to a profit of £270m in the first place, from profits half a decade ago of only £90m, and the situation Centrica are in as a long term trend.

For a start Centrica are currently looking at a 13% margin, this is really no different from where they've been in the past (slightly down in terms of real profit amount, though insignificantly so), 2005 saw around 11% margins, 2006: 9%, 2007: 12%, 2008: 9%, 2009: 9%, 2010: 13%...all the time with increasing revenues from 13bn to 22bn in this half a decade space of time.

Then there is British Gas (residential only), 1.5% margin in 2005, 2006: 1.3%, 2007: 9%, 2008: 5%, 2009: 8%, 2010: 9%. It's currently looking like 2011: will end up being somewhere below that 9%, perhaps as low as it's 2008...yet still with profits that are 3 times what they were half a decade ago, and almost doubled revenues to boot.

Note: you can get all these figures from the Centrica website, such as here.

Let's never forget, this is a company that still hasn't acted fairly to consumers over the disparity in energy charges versus wholesale energy prices. Indeed this is an industry that still hasn't acted fairly.

The interesting thing may well be *why* the price rises are being justified, If you look at todays release you'll see the following statement...

In residential energy, the combination of higher commodity prices and significantly lower consumption resulted in operating profit being less than half the level recorded in the corresponding period last year. Average residential gas consumption fell by 18% in the first six months of the year, and electricity consumption was 3% lower, reflecting the milder weather conditions together with underlying energy efficiency improvements.


This is the danger of a business mentality operating our core utlities in the country, profits come first, and a drop in usage of services (and thus a drop in revenue) is seen as a reason for declining profits. If the danger to Centrica/British Gas's business is lack of use, be it from warm weather conditions, or energy saving measures, then it's only answer is to cut parts of it's business, a potentially unworkable solution given the inevitable rise in the demand over winter, or to raise prices.

When not using energy becomes a reason to increase the price of energy, the exact opposite of the way supply and demand works, we surely have to ask the question of whether or not businesses are fit to run these vital services in the model they currently do. Beholden to their share holders, when the only way to keep both your profits and your profit margin up, to keep your profits in growth, during a time when less energy is being used for a myriad of reasons...the only answer is to increase prices.

The question has to be where do we go from now without solutions like Nuclear and/or accelerated roll out of sustainable local energy? As consumers it is now both in our interest to not use energy (lest we help push up wholesale prices as supply diminishes) and to use energy (lest we not use enough of the potential supply and force companies to increase prices anyway to cover their losses), truly stuck between a rock and a hard place.