OFGEM RISKS LOSING PUBLIC TRUST AFTER BRITISH GAS’S PROFIT BONANZA

gas prices eased this year.

The UK’s largest supplier, home to 7.5m household customers, raked in nearly £1bn from just six months of trading –a bottomline global fossil fuel producers would be proud of.

This is a marked contrast from last December when British Gas consisted of just £72m of Centrica’s £3.3bn bumper global earnings amid a worldwide commodities boom, with the company now powering nearly half of its £2.1bn half-year profits with a chunky £968m contribution. While oil and gas giants like Shell and BP rode the wave of a freak spike in energy prices last year, retail suppliers have been constrained by tight profit limits and a rigid price cap, weighed down by elevated wholesale costs which have powered the profits of producers.

This has softened scrutiny towards the industry over the past couple of years, with Westminster’s crosshairs instead focused on oil and gas producers – which have posted hundreds of billions in collective earnings since Russia’s invasion of Ukraine.

However, with rival Big Six players EDF and Scottish Power now also posting massive profits, the domestic energy crisis which saw the collapse of 30 energy firms and year-long de-facto nationalisation of Bulb from late 2021 has never seemed more distant.

Households Suffer Price Cap Pain

The turnaround follows Ofgem’s changes to the price cap formula this year, with the watchdog bringing in generous allowances to enable suppliers to recoup costs incurred from the pandemic and claw back vast profits. Scottish Power also highlighted the measure in its swing from an £86m loss to £576m in the green.

Ofgem has pledged that this situation will be a one-off. It said the huge earnings from suppliers this week is a temporary adjustment, with allowances set to be tightened this year again amid the regulator’s focus on financial discipline.

To that end, the watchdog has brought in new capital adequacy rules establishing requirements for net asset value, following the introduction of ringfencing requirements for renewable payments, and a market compliance review on fiscal stability.

Ofgem chief executive Jonathan Brearley has also written to suppliers warning companies against paying out dividends if they are loss-making.

However, all eyes will now be on Ofgem from Whitehall to Fleet Street, as its latest tinkering with the price cap has placed suppliers in the same conversation as profit churning banks this week, powering a growing perception that the industry is profiting from the pain of customers.

While the watchdog argues allowances have been necessary to stabilise the sector and shore up suppliers, it has also helped sustain energy bills at near double conventional levels amid a cost of living crisis, with British Gas expected to have made £66 people live in fuel poverty – meaning over 10 per cent of their income is spent heating their home.

Pressure On Ofgem To Ease Energy Bills

Centrica boss Chris O’Shea expects British Gas’s profits to ease to around £150-£200m over the coming years, and has pointed to the company’s £100m support package for households – around a tenth of the supplier’s monster earnings –in its defence. Nevertheless, its key focus appears to be its shareholders, with dividends now up a third and buybacks soaring to £1bn, helping the FTSE 100 firm’s shares spike to a fouryear high of 133p per share.

Centrica was also exposed in January for its use of third-party agencies to forcibly install prepayment meters in vulnerable people’s homes, which also raised questions over Ofgem’s regulatory abilities. That is not to say everyone in the industry is unaware of the challenges ahead for UK

Utilita Energy chief executive Bill Bullen has called for £6bn of support to shave £600 off household energy bills for up to 10m customers this winter – paid for through scrapping legacy renewable contracts in the industry. This would be smaller in scope than the Energy Price Guarantee, but targeted at the most vulnerable customers, with millions not included in the coldest months of the year without government support packages, with an elevated price cap coming two years into a stagnant economy following the pandemic. Such a mix is likely to see more households switching off energy supplies and choosing between heating and eating.

If the energy sector wants to maintain the trust of customers, it is time for suppliers to come up with a plan to support low-income households, which Ofgem should be compelling them to do.

The government has stepped in with costly multi-billion pound provisions for households and businesses for nearly two years, provided to every consumer in the country. This was driven partly by the fact suppliers could only afford so much support when suffering losses.

Now, as they return to profitability, Ofgem should be pushing energy firms into finding more ambitious solutions ahead of winter for vulnerable customers. Otherwise, Ofgem risks being accused of serving the firms it is supposed to regulate rather than customers.

Simply put, £100m is a scandalously low amount for Centrica to be offering . This might seem like a stark call for intervention in the energy market, yet higher bills risk the energy industry losing the trust of customers and the regulator no longer having the confidence of government – which threatens all sorts of volatile solutions such as nationalisation or breaking up suppliers.

If the energy sector wants to head off these threats, coming up with solutions this winter is vital – and as August approaches, the clock is ticking.

The National Farmers Union has urged the government to “look closely” at potential risks to domestic food production after the closure of the UK’s largest ammonia facility. Tom Bradshaw, deputy president of the industry body that represents over 46,000 farming businesses, said relying on overseas imports for a vital tool in managing fields and crops was “concerning” and exposed the country’s fertiliser market “further to global volatility”. This follows CF Fertilisers last week confirming the closure of ammonia production at its facility in Billingham, Teesside, due to high UK gas prices putting pressure on profit margins – 10 months after first shelving production. It has already closed its plant in Cheshire. CF Fertilisers argues there is “ample availability” of ammonia for import, and that its decision will lead to more efficient and competitive production in the UK.

Teck Mulls Coal Sale Amid Glencore Interest

Teck Resources is considering a partial sale of its coal business, its chief executive Jonathan Price has revealed. Glencore made an $8.2bn bid for the unit earlier this year, but Teck is courting suitors in the hopes limited global coking coal mines will drive up its valuation. “This business is positioned to capitalise on the global supply gap from existing mine depletion and a lack of new projects coming into production,” Price told news agency Reuters, after the company reported quarterly earnings that missed analysts estimates. He did not reveal the names of the other potential suitors, but confirmed Teck was “actively” engaged in the process when analysts asked whether there will be a fresh update by October. Whether Glencore makes a fresh bid remains to be seen.

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What can we do to retain trust in the energy sector? Email energy editor Nicholas Earl at nicholas.earl@cityam.com