Profits made by British Gas owner Centrica have sparked widespread political outrage.
“Rishi Sunak should get a grip – and impose a meaningful, tough windfall tax,” said Sharon Graham, general secretary of Unite, the UK’s second-largest union.
“Centrica’s full-year profits are more than triple the year before,” observed the shadow chancellor Rachel Reeves.
The parent company of British Gas indeed just booked 2022 “operating profits” of £3.3bn, up from £948m in 2021 – a more than threefold rise. Centrica’s “underlying profits”, excluding the one-off sale of its Spirit Energy business, were slightly lower at £2.8bn, but over seven times the 2021 figure of £392m.
These surging profits are, of course, set against an ongoing cost-of-living crisis. Having peaked at 11.1pc in October, UK inflation remains stubbornly high – with the consumer price index still 10.1pc higher in January than the same month in 2022.
Energy bills have been central to this inflation surge. Households shouldered combined gas and electricity bills averaging around £2,500 last year, almost twice as much as in 2021. Utility bills have soared even higher for many businesses, not least energy-intensive manufacturers.
All of which explains why the power provider faced a barrage of opprobrium when its results were released last week, with trade unions pointing to “rampaging energy profiteering” and Labour renewing calls for a “proper” windfall tax.
Centrica should, in my view, be fined for the heavy-handed imposition of prepayment meters. But the broader political response to their results reveals a lack of understanding about how the UK’s energy industry works – or fails to work.
Rather than jacking up an already sky-high tax rate on North Sea energy exploration, ministers should instead reform how energy is priced – so consumers can finally start benefitting from the big shift over the last decade in the UK’s energy mix.
Energy giants across the world notched up combined earnings of over $200bn (£166bn) during 2022. Along with Centrica, other UK-listed energy firms unveiled record hauls, with BP and Shell making £23bn and £33bn respectively on worldwide operations, more than double their 2021 profits.
This is hardly surprising, given how commodity prices rocketed due to the war in Ukraine and related Western sanctions. It’s also not surprising that during 2020, with the world economy mired in lockdown, both Centrica and BP suffered heavy annual losses, with Shell’s share price sinking to a two-decade low.
Commodity prices are inherently cyclical – and subject to massive shocks, both up and down. While large energy companies make serious money in some years, in others they make little or nothing. What’s vital is the industry survives and invests in some form, given its pivotal role in keeping the global economy running.
So Centrica wasn’t alone in doing well last year – and the money it generated wasn’t off the back of cash-strapped households. Unpacking the accounts, its profits were overwhelmingly made “upstream” – in the production of oil and gas and related wholesale trading.
British Gas – the customer-facing “downstream” operation – made just £72m last year, 39pc down on 2021. Given that British Gas serves around 8m domestic customers, this amounts to annual profits below £10 per household on energy provision - a miniscule margin. And the British Gas boiler and installation division last year made a loss.
Any additional “windfall tax” on North Sea oil and gas extraction, however politically tempting, would be deeply counterproductive. At a time when energy security is centre-stage, we should be encouraging domestic energy production instead.
Oil and gas companies operating in the UK already routinely pay 40pc corporation tax, more than twice the rate applying to other companies. As Chancellor, Rishi Sunak last year imposed an additional 25pc “energy profits levy”. And last month, his successor Jeremy Hunt hiked that to 35pc – raising the total tax on UK energy extraction to an eye-watering 75pc.
For years, global energy giants have been drifting away from the North Sea. As a result, more than two-thirds of operations in our offshore fields are conducted by small, independent firms.
Lacking the deep pockets of their multinational rivals, they’ve collectively warned the current 75pc tax rate is an “existential threat”, risking a “complete collapse” of our North Sea industry. Do we really want it to go higher?
What policymakers must do is instead make our energy market work better for both domestic and commercial consumers.
In April, the Government’s energy price cap is set to rise, with the average household bill increasing from £2,500 to £3,000 per annum. With wholesale oil and gas prices having fallen, and now below where they were when Russia invaded Ukraine a year ago next Friday, there will be serious anger this spring when energy prices go up even more.
The reality is our energy market is rigged – due to “wholesale marginal pricing”. Since privatisation, the rules state that companies supplying power to the electricity grid are paid the same rate at any given time, with the rate set by the highest-cost producer.
Last year, renewables accounted for 36pc of the UK’s electricity generation, up from 11pc a decade ago. Over the same period, the share of coal-fired power plunged from 37pc to 2pc. Yet the unreliability of renewables means gas-fired power stations remain vital, now accounting for 39pc of our energy mix, up from 30pc in 2012.
Wind and solar energy are, by their very nature, intermittent – and often fall short, due to low winds or a lack of sunshine. Owners of coal and gas-fired power stations must then be persuaded to fire up extra capacity at short notice – to fill the gap and, quite literally, keep the lights on.
This is hugely costly but means, under marginal pricing rules, that all energy generators then make huge profits, including the renewable companies – with the customer-facing energy providers then paying huge prices for power, which they try to pass on to consumers.
Far from finger-pointing, what’s needed are serious energy industry rule changes – along with a more solid provision of constant “baseload” energy, preferably using nuclear. We need to tackle this marginal pricing racket and end the scandal of overpriced UK energy.
