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Wednesday, 19 October 2011

Wednesday, October 19, 2011 Posted by Jake 7 comments Labels: , , , ,
Posted by Jake on Wednesday, October 19, 2011 with 7 comments | Labels: , , , ,

Another addition to our LiebraryIn October 2011 OFGEM reported that energy companies' profit margins had leaped from an average £15 to £125 per dual-fuel customer per year. They claim that this equates to a 9% margin.

The industry claims that this margin is a reasonable return on their costs. The reality is that over 50% of what they charge is down to the commodity cost of the fuel plus the VAT.

This 50% for commodity and tax is just a pass-through cost. The retailer buys it from the wholesaler, and delivers it unchanged to your house.

It is no more legitimate for an energy retailer to fiddle down its profit margin calculation in this way than it would be for the post-office to include the value of the contents of the packages it delivers in its turnover.

Therefore the real margin based on the cost of delivery is actually double 9%,  coming in at a gouging 18%.


Graph from OFGEM Supply Market Report of June2011.


7 comments:

  1. I don't understand from your explanation and pie chart how the energy companies are making 18% profits. I understand the post office analogy and how that would clearly be wrong for the post office to do such a thing. Where is the connection between the post office analogy and the rest of the explanation?

    The 50% for commodity and tax is a pass through cost from the wholesaler by the retailer to the consumer. Fine, I see that. Are you saying they are increasing (doubling) the commodity cost between the wholesaler and the retailer hence their 18% profit margins? If so, it's not clear to me from your explanation and pie chart. If this is done another way, please clarify.

    ReplyDelete
    Replies
    1. Say the retail energy business turns over £100, and makes £9 profit. It can claim to make a 9% profit on the turnover.

      Of this £100 turnover, £50 is the wholesale cost of energy. This energy is being delivered to the retail customer - like the contents of an envelope being delivered by the post office.

      Excluding this £50 pass-through cost leaves £50 of the original £100 turnover. On this basis the retail energy business is making £9 margin on this £50 = 18%.

      Delete
  2. Or even if the doubling of profits is being made up from the 50% commodity costs please clarify your article anyway. Thanks.

    ReplyDelete
  3. Your claim regarding the PO and including the cost of mail it delivers only holds water if the PO has to actually create the mail in the first place.

    At best that's a poor analogy, at worst it's clutching at straws. You've not proven any kind of accounting trick at all.

    The UK faces a big issue in the medium term future with the energy production capacity. Scaremongering is doing nobody any favours.

    ReplyDelete
    Replies
    1. Generators 'create' the energy and take their profit when they sell to the Retailers who deliver energy to homes. Retailers don't 'create' the energy, they just deliver it. Vertically integrated energy companies insist their 'wholesale' and 'retail' arms should be treated seperately.

      Delete
    2. I think Jake has a good point here and has explained the accounting trick fully. Excellent expose.

      Delete
  4. BBC reports that inspite of a 28.6% fall in Retail profits, SSE's overall profits grew by 9.6% due to bumper profits in its Generating & Transmission business:
    http://www.bbc.co.uk/news/business-27498463

    ReplyDelete

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