Are you frustrated by the massive increase in profits at British Gas? It’s a reasonable reaction considering they made an operating profit of £969m in just six months. However, instead of blaming British Gas, the real issue lies with the regulator Ofgem. This surge in profitability is actually intentional and approved by Ofgem. EDF Energy and Scottish Power also experienced significant profits in their retail operations during the same period.
This situation is the result of a complicated concept known as “cost recovery” under the price cap mechanism. Essentially, suppliers are allowed to recoup the extra expenses they incurred last year when they had to supply gas and electricity at a capped price that was lower than wholesale levels.
To put it simply, the formula used for the price cap was not designed for volatile periods like the Covid pandemic and Russia’s invasion of Ukraine, which caused wholesale prices to fluctuate greatly. Approximately £500m of British Gas’s £969m profit came from these backward-looking “allowances” under the price cap.
But here’s the controversial part: Ofgem’s latest proposals suggest a permanent change to the price cap formula starting in October. This change will affect the “Ebit allowance” (earnings before interest and tax), which represents the portion of our energy bills allocated as profit for efficient suppliers. Under the old model, this allowance was fixed at 1.9%, but the new formula will be more generous to suppliers at all price caps under £4,000, with an expected Ebit rate of 2.4% in October.
The regulator’s justification for this change is twofold. First, the energy sector as a whole hasn’t made profits in the past four years, and second, unprofitable suppliers tend to go out of business, resulting in higher costs for consumers in the long term. Ofgem should be held accountable for licensing so many under-capitalized companies, leading to their failures and increased burdens on consumers. However, within the context of the price cap, there is some logic behind allowing higher returns for suppliers.
Nevertheless, there are still significant real-world problems with the current system. If an average efficient supplier can earn 2.4%, it stands to reason that better-performing companies, like British Gas, would be able to achieve even higher profits due to their larger size and capabilities. Additionally, the “one size fits all” price cap is outdated and ill-suited for the future of renewable energy and time-of-day incentives. Moreover, the cap does not take into account average bills that could permanently exceed £2,000, making them unaffordable for many consumers. Implementing a social tariff or a discounted rate for vulnerable groups would be a sensible solution to address these issues.
Furthermore, Ofgem itself has expressed frustration with the rigidity of the price cap, referring to it as a “blunt instrument.” However, making fundamental changes to the cap requires government intervention. Therefore, if you have complaints about the current system, directing them towards the government is the appropriate course of action.
In conclusion, the situation with British Gas’s soaring profits is a result of the regulatory framework put in place by Ofgem. While there is some justification for allowing higher returns to suppliers, there are still significant flaws with the price cap system. Addressing these flaws will require government involvement and potentially implementing measures like social tariffs and discounted rates for vulnerable groups to ensure fair and affordable energy pricing.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
