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|Title||UK Energy prices and profits|
|Authors||Energy Institute Knowledge Service team|
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.
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.
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
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).
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.
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)
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
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