British Gas profits keep energy market reform on the agenda

Centrica has defended household energy prices as the group reported annual pre-tax profits of £2.4bn, with growth in its oil and gas exploration business offsetting a slump in earnings at its British Gas arm.

Despite a balmy 2011 pushing down revenues at British Gas, Centrica was still able to make a profit of around £50 a household from its residential unit. Group pre-tax profits rose 1% in 2011, Centrica said on Thursday, with contrasting fortunes at its two biggest operations. Operating profit at its "upstream" operation, one of the largest gas producers in the North sea, climbed by a third to £1bn. The "downstream" operation, dominated by energy provision for 10m UK households, saw the British Gas residential outfit report a 30% fall in operating profit to £522m.

However, household bills remain the subject of scrutiny from the media and the energy watchdog, Ofgem, which has raised the threat of intervention if reforms including changes to tariffs do not work. Sam Laidlaw, the Centrica chief executive, said higher household prices last year were offset by lower usage due to mild weather - reducing the average bill by £37 compared with 2010. He added that British Gas's "honest conversation" campaign was attempting to alter perceptions of the major energy suppliers in the UK, dubbed the "big six", who control 99% of the domestic market in the UK. Last August, British Gas raised electricity prices by 16% and gas prices by 18%, although it has subsequently cut electricity prices by 5% while leaving gas prices unchanged.

"We need to raise public awareness as to what is on the bill and why bills go up, and that is driven by global wholesale prices." Laidlaw added.

Centrica backs its argument by pointing to wholesale gas prices for next winter, which are 15% higher than for 2011. Nonetheless, a perennial criticism of energy companies is that when wholesale prices climb they are quick to raise tariffs, but are slower to cut them when the wholesale market retreats.

He added that the British Gas campaign will "remind people that actually we have the highest rate of [household] switching [to another supplier] of any market currently in Europe". This week another big six supplier, French-owned EDF, said earnings at its UK arm rose 8.5% to £1.6bn in 2011.

Laidlaw also questioned the probable impact of Ofgem proposals, published this week, to force the big six to auction a quarter of the energy they generate. Ofgem hopes that selling this energy on the forward market, which guarantees supplies for months and years, will help smaller players compete by protecting them from short-term fluctuations in energy prices. Laidlaw said that Centrica already sells "a lot" of the energy that it produces on the open market, but is nonetheless a net buyer of electricity because of the scale of demand from residents and businesses. "As Centrica, we are a net buyer of electricity, so we are in a similar position to the smaller companies." However,
Ofgem's attempts to reform the market are backed by the government, with the new energy secretary, Ed Davey, welcoming the "momentum that is building behind badly needed reforms of our energy market".

Reiterating the argument that energy firms need large profits to secure UK energy supplies - Centrica spent £246m on North Sea oil fields this week - and meet climate change goals, Laidlaw added in a statement: "2011 was a tough year, both for Centrica and our customers. But the strength of our integrated business and balance sheet means we've been able to take the lead in helping customers through these difficult times, as well as delivering growth and making the investments on which Britain's energy future depends." Adjusted earnings, which account for Centrica's 40% corporate tax rate, rose 3% to £1.3bn.

23/02/2012 - guardian

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