Record Description


  • Log in to access the full content

    Some of our content is available only to EI members or registered users

    Members should log in to access PDFs and complete articles. If you haven´t already, please register to access personalised saved searches and organisation contact details. Join as a member for the full range of EI benefits!

    Who can access what content?

Information Sheet

Name
Book Cover
TitleUK Energy prices and profits
Forename
Surname
Designation
Job Title
Sub Title
Authors Energy Institute Knowledge Service team
Corporate Authors
Introduction
Organisation
Journal Title
Abstract

UK energy prices and profits


Energy price caps for dual fuel bills (gas and electricity) were a prominent topic of the 2017 UK general election and continue to be debated. This information sheet focuses on what’s at the heart of this debate: the development of energy prices in the UK. The EI Information Sheet “Rigged or competitive? UK retail energy” focuses on the structure of the UK retail market and policy proposals to ensure affordability of energy.


Highlights

  • Based on fixed consumption and adjusted for inflation, dual fuel bills were 8% higher  in 2016 than in 2010 and 57% higher in 2010 than in 2000.
  • Accounting for actual consumption of gas and electricity, bills were 11% lower in 2016 than in 2010 (adjusted for inflation).
  • The UK has low electricity and gas prices in comparison to EU-15 countries and around average in IEA comparison.
  • Gas prices have varied to a larger extent over the years than electricity prices.
  • Average profit margins of the big 6 energy suppliers have increased from 0.9% in 2009 to 4.5% in 2016.
  • In 2015, UK households spent on average 4.4% of their total expenditure on gas and electricity, similarly to early 1990s’ levels.
  • The poorest 10% of households spent almost 10% on energy (electricity and gas) in 2015.


1          Development of domestic energy prices

We explore three indicators for energy costs of households: prices, annual bills and share of household expenditure spent on energy.

1.1        Prices

While decreasing in the late 1990s and early 2000s, UK domestic electricity and gas prices have almost steadily been increasing in real terms (i.e. taking account of inflation) between 2003 and 2014 but have decreased slightly in the last 2 years. Gas and electricity prices movements are broadly in line (Figure 1).


Figure 1: Fuel price indices in the domestic sector, adjusted for inflation, using GDP deflator, 1996-2016; data: (BEIS, QEP )

Gas prices have been increasing on average by 2.3% per year in real terms (i.e. adjusted by inflation) in the years 2011-2016, and were 13.1% higher in 2016 than in 2010. Electricity prices have increased on average by 2.6% per year in the same period, they were 16.4% higher in 2016 than in 2010. In comparison, motor fuel and oil prices have decreased on average by 2.4% per year in this period, cumulatively by 15.1%.

This moderate change (in real terms) is in part due to a decrease in 2015 and 2016 of both gas and electricity prices after increasing between 2010 and 2014. Furthermore both have increased significantly between 2000 and 2010: Gas prices were 99% higher in 2010 than in 2000, electricity prices 47%. In comparison, prices of motor oils and fuel increased by 18% over the same period (all changes in real terms).

All of the big six energy companies have increased prices in 2017 for their standard variable tariffs (SVTs, see below). These increases, mainly driven by electricity price rises, will lead on average to an increase of 8.0% of an average dual fuel bill for an SVT customer of the big six (cash terms, cp. Figure 2).


Figure 2: Recent price increases of major energy suppliers in the UK in 2017; data: suppliers’ websites, BBC, The Guardian

1.2        Bills

The indices above are based on the developments of prices, i.e. tariffs offered by energy suppliers. The developments of dual fuel bills based on a fixed consumption level of 3800kWh/year of electricity and 15000kWh/year of gas are in line with these price developments. In real terms they have been increasing rather continuously from 2005 to 2014 while decreasing in 2015 and 2016 due to lower gas prices. The gas share of the bill has increased from 46% in 2000 to 53% in 2016.


Figure 3: Average dual fuel bills in Britain from 1996-2016, in 2010 terms (using GDP deflator); based on fixed consumption of 3800kWh of electricity and 15000kWh of gas and on standard electricity tariffs (i.e. not Economy 7); data: (BEIS, QEP June 2017, tables 2.2.1 and 2.3.1)

The average dual fuel bill in cash terms (unadjusted for inflation) fell by £61 from £1297 in 2015 to £1236 in 2016, corresponding to a real term decrease of 6.5%. The dual fuel bill has increased by 8% between 2010 and 2016, and by 57% between 2000 and 2010 (both in real terms, cp. Figure 3).

As mentioned, these numbers are based on fixed consumption levels. However the electricity and gas consumption varies every year, mainly due to fluctuations of the weather, i.e. temperatures, but also due to continuing decreasing trends like energy efficiency improvements of appliances and homes. Bills based on actual average consumption were £1134 in 2016 (cash terms), their lowest since 2011. Bills based on actual consumption stayed on average flat (in cash terms) compared to the previous year in the period 2011-2016. Adjusted for inflation, in 2016 bills based on actual consumption were at their lowest since 2010. They have decreased on average by 1.5% in the years 2011-2016, compared to the previous year, and were 11% lower in 2016 than in 2010 (Figure 4). Monitoring of bills based on actual consumption started in 2010, thus no numbers are available for earlier years.


Figure 4: Average annual domestic energy consumption in the UK: 2010-2016 (kWh) (left) and average annual bills based on actual consumption from 2010 to 2016, adjusted for inflation; source: left: (BEIS, QEP special article 2017), right: EIKS, based on data published by BEIS

Similarly, Ofgem’s estimates for average bills, which factor in fluctuating consumption, suggest that in 2014-2016, bills have been reduced by an average of 4% in cash terms, compared to the previous year.

1.3        Household spending on energy

1.3.1         Spending per household

The average proportion of expenditure spent by each household on gas and electricity decreased continuously from 4.8% in 1993 to 2.9% in 2004. After that, it has increased rather continuously up to 5.1% in 2013. Since then it has been reduced to levels similar to those of the early 1990s, the years of beginning market liberalisation: 4.8% in 2014 and 4.4% in 2015 (Figure 5).


Figure 5: Energy spend as percentage of total household expenditure (UK); data: (Ofgem, 2017) based on (ONS, family spending in the UK) data

An average of 3.7% of household expenditure was spent on petrol, Diesel and other motor oils, compared to 4.4.% for gas and electricity in 2015.

The share of expenditure of each household spent on heating fuel and power however varies significantly among income groups: In 2015, almost 10 per cent (9.7%) of expenditure was spent on energy by households in the lowest income decile compared to just 2.8 per cent for those in the highest income decile. The share of expenditure varies over time to a much higher extent in percentage points for the poorest households than for the average household (Figure 6).


Figure 6: Proportion of expenditure spent on fuel and power by income decile; source: (BEIS, QEP Jun 2017) based on (ONS, Living Costs and Food Survey)

1.3.2         Total household spending

The share of expenditure of all UK households spent on electricity, gas and other heating fuels is still significantly lower than it was before the 1990s: the peak of the period 1997-2016 was at 3.25% in 2013, whereas the peak over the whole period from 1970-2016 was in 1982 at 5.37% (Figure 7).


Figure 7: percentage of expenditure of all households in the UK spent on electricity, gas and other heating fuels from 1970-2016; data: (BEIS, QEP Jun 2017, table 2.6.1)

1.4        International Comparison

The UK has low domestic gas and electricity in comparison to EU core countries. The prices are slightly above IEA median in the case of electricity and below IEA median in the case of gas.

  • Domestic gas and electricity prices are low in EU-15 comparison: For the period from July to December 2016 they were the second and sixth lowest in the EU-15 respectively (Figure 8)


Figure 8: Domestic gas (left) and electricity (right) prices in the EU-15 for the period July 2016 – December 2016; source: (BEIS, QEP Jun 2017)

  • In 2016, UK domestic electricity prices were the 13th highest in the IEA (of 27), 2.1% above the median, 66% above prices in the US; UK domestic gas prices were the 9th lowest in the IEA, 19% below the median, 56% higher than prices in the US (BEIS, QEP Jun 2017).

2          Profits by the Big 6

Costs and profits of the big energy companies are a very contentious topic which has been at the centre of several public and policy debates in the last years. Claims of excessive price rises and profits by energy companies stand next to more than substantial write offs by utilities in recent years due to the transformation of energy markets devaluing their fossil fuel assets.

The big 6 energy suppliers are obliged to reveal their annual costs, revenues and profits to Ofgem. For the year 2016 they reported EBIT margins (defined as earnings before interest and tax divided by total revenue) between -6.3% (npower) to 7.2% (Centrica) for their combined domestic (i.e. residential) gas and electricity supply businesses with an average of 4.5%. While the suppliers’ aggregate margin has steadily increased from 0.9% in 2009 to a record 4.5% in 2016, the margins differ significantly between companies and years. npower and EdF have been making losses in the majority of the covered years (Figure 9).  


Figure 9: Domestic combined gas and electricity supply margins; data: (Ofgem, data portal, pre-tax domestic supply margins, 2017)

Reports about potentially high profits of energy companies have gained a lot of media attention in recent years. In 2016, a study by PWC for Energy UK on expected costs and revenues of big electricity and gas suppliers in the UK suggested profit margins of up to 28% per dual fuel bill, instead of the 4% claimed by the industry and used by Ofgem. In July 2017, Citizens’ Advice estimated that network companies such National Grid would be making unjustified profits of £7.5bn over a period of 8 years, which would correspond to a 19% profit margin. In September 2017, a report by think tank ECIU claimed the 6 electricity distribution grid companies made an average profit margin after tax of 32 per cent a year between 2010 and 2015.

The Competition and Markets Authority (CMA) has concluded in 2016, that Ofgem lacks requisite information to assess generation and retail profitability. It identified a lack of financial transparency due to the complexity of big energy companies’ operations and their reporting practices as well as differing accounting regimes between companies, which had been recognised before by parliamentary committees, consumer groups and Ofgem. Consequently, the CMA proposed a reform package for the financial reporting requirements for energy suppliers.

3    Further Reading

EI Information Sheet: Rigged or competitive? UK retail energy

House of commons briefing paper on energy prices (2016)

CMA, Energy market review (2016)

BEIS, QEP: Quarterly published statistics on energy prices

BEIS, Domestic Energy Prices (tables for QEP)

Ofgem, Retail Market Indicators

Ofgem, Understanding Trends in Energy Prices

ONS, Brief guide to consumer price indices (2016)

Description
Story
Overview
Editors
Publisher
Place of Publication
Publication Date2017-9-21
Edition
ISBN
Physical Description
EI Status
Organisation Address
Organisation Contact
Organisation Telephone
Organisation Fax
Department
Course Title
Course Accreditation Level
Course Status
Course Accreditation Period
Is a Learning Affiliate
Conference Date
Conference Location
Organiser
Notes
Periodical Type
Country
Location
Knovel
Energy Disciplines Economics, business and commerce | energy | Energy prices | Policy and Governance | Regulation and accountability |
Energy Processes Energy demand and consumption |
Energy Products Electricity | Energy | Oil and gas |
Subjects Electricity | Energy | Energy consumption | Economics, business and commerce | Policy and Governance | Regulation and accountability | Oil and gas |
Sector
Classification
Websites  
Milestone Source  
Related Records
Accreditation
Accreditation
Accreditation letter sent
Accredited Courses
Adverts
Alternative Title
Answer
Area
Article Source
Assessment Completed
Assessor
ASTM
Start Date
End Date
Next Significant Date
ASTM Reapproved Date
Average Fees
Average Starting Salary
Award Notes
Award Title
Barrels
Bib Ref
Binding
Binding Status
Brand Name
BSS ID
Colour
Committee
Conference Start Date
Contact details
Contact Email
Contact Fax
Copyright
Crude Status
Current Subscription
Degree Notes
Degree Type
Department Profile
Document Type
Editors Note
EI Ambassador
EI Event Type
EI Membership No
EI Support
EI Website
E-ISBN
E-ISSN
Email Attachments
Email From
Enquirer
Enquiry Body
Enquiry Details
Enquiry Mode
Enquiry Summary
Enquiry Type
Equivalent Standards
Events Listings
Exact Date
Facility Address
Facility Contact
Facility Fax
Facility Name
Facility Tel
Frequency
General role
Heated Tanks
Holdings
How do I apply?
Image ID
Image Source
Milestone Type
Image Subjects
Image URL
Images
Index
Individual Awards
Invoice amount
IP Test Method Number
ISSN
Issue Date
Issue Number
Job Adverts
Keywords
Language
Large Vessel - ton
Last Updated2017-9-21
Last Edited By
Last Edited Date
LAst Edition Printed
LinkedIn  
Max Capacity - cm
Media
Member Status
Min Capacity - cm
Month and Year
Name of Enquirer
Number of Tanks
Officials
Oil and Gas Fields
Order Number
Organisation Note
Original Image
People as Subject
Periodical Abbreviation
Periodical ID
PetNews ID
Photographer
point of Supply
Possible start up
Previous Title
Print Note
Production
Publication Status
Publication Year
Qualification obtained / needed
Query ID
RAE score
Range of products
Reaffirmed Date
Received Date
Region
Related Designations
RelevanceRank
Report Number
Research Details
Response
SA
Section
See
See Also
Series
Series Number
Size
Sort
Source
Staff
Staff Notes
Standards Superseded
Student Chapter
Sub Section
Sulfur
Summary
Supplier
Table of Contents
Testimonial
Time Email Received
Time Enquiry Sent
Title Continued
Total Capactity - cm
Typical responsibilities
Unaccredited Courses
Update Contact
Update Contact Title
Update mail
Usage Allowed
Uses
Addresses Datasheet Number
Verified
Video Profile
Volume Number
Volume quantity
Volumes
Website Note
WOS
Yearbook Categories
Yearbook contact
Yearbook Status
Young Person Network
API
Draft - metres
Exploration Interest
Job Description
Photograph
Attached Documents
Document Download
Created By
Notice
Buy from BSI
Affiliations
Additional Accreditations
Areas of expertise
Professional Qualifications
Skills and Concepts
Sector Experience
Technology Experience
Content in this issue

 Go back to the previous page

Please log in to save this item

           Email this page.      Delicious Delicious