British Gas results comment…the margin says it all

Wholesale Energy Prices July 2010

Wholesale Energy Prices July 2010

British Gas, the retail energy brand of Centrica plc, today (28 July 2010) reported another blockbuster set of results for the first six months of 2010.
 
Key features of the results
 

  • 223,000 domestic customer accounts added.
  • British Gas increased customer numbers for both gas (+7,000) and electricity (+216,000).
  • The reported operating profit, at £585m, increased by 96% year on year and 95% sequentially (half on half).
  • Reported operating margin came in at 13.2%.

Interesting features of the results
 
According to research from energy price comparison website TheEnergyShop.com
 

  • The reported operating profit is a highest ever by British Gas retail for a 6 month period.
  • Operating profit per customer account served (at £37.00) is the highest ever for a 6 month period and better than what British Gas usually makes in a good year.
  • Even so, the operating results were depressed by a £94m charge for closing out some loss making gas contracts and a £15m spend on solar panels for schools. Stripping out these charges, the results would have been materially higher.
  • This is the eight successive half in which British Gas has reported an operating profit against a background in which wholesale prices have both risen and then fallen significantly (see graph below).
  • British Gas managed to retain 95% of the 500,000 fixed price customers that came off fixed price deals during the period even although some of those customers were hit with 40% increases in their energy prices.

British Gas Retail Operating Margin 2004-2010

British Gas Retail Operating Margin 2004-2010


Wholesale Energy versus Retail Energy Prices 2004-2010

Wholesale Energy versus Retail Energy Prices 2004-2010

What we think:
 
This is a great result for British Gas particularly at a time when energy suppliers are supposed to be getting squeezed by higher infrastructure and environmental costs. However, if you look at the difference between wholesale and retail prices, which remain at historically very high levels, then the results are predictable.
 
It would be unfair to be too critical of British Gas given its recent record. It cut its gas prices earlier this year than the other Big 6 suppliers, it has the cheapest standard dual fuel tariff (although by a marginal 1%) and it does not discriminate against its existing customers who are all free to switch to its cheapest online tariff if they choose to. The real question is, why don’t they?
 
Energy consumers have the opportunity to shop around for cheaper energy deals and can easily save themselves in excess of £250 a year. It is simple and safe to do so.
 
It is also a mathematical certainty that British Gas’ retail profits would be lower IF more of its customers were on its discounted online tariffs. Unless consumers start to engage more actively with the market by doing their own independent price comparisons, rather than dealing with energy suppliers directly over the telephone or on the doorstep, then customers will keep over paying for their energy, and energy suppliers will keep making high profits.

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