Issue of the week: fixing a dysfunctional energy market
Centrica and its boss are in the national doghouse. Is the criticism deserved?
Centrica’s name “implies neutrality” – suggesting “a middle-of-the-road utility just doing its job”, said Lex in the FT. That image is somewhat “out of kilter” with the British Gas owner’s current position in “the eye of a political storm”. Householders, consumer campaigners and parts of the media are “furious” that Centrica’s annual profits have jumped to a record high of £3.3bn at a time when many customers are rationing their energy use. The row over prepaid meters installed by debt collectors in vulnerable households hasn’t helped. In the furore, it’s often forgotten that, two years ago, CEO Chris O’Shea was struggling “to garner enough cashflow to invest, never mind pay shareholders”. Or that the British Gas retail business, which once made £200-300m in annual operating profit, made nothing last year: the running was made by Centrica’s energy, market and trading and upstream gas divisions.
That might be technically true, said Alex Brummer in the Daily Mail, but punters don’t see the distinction. And as Britain’s biggest gas supplier, with some ten million customers, Centrica could certainly share more of its “largesse” with households. Even more infuriating for consumers is the prospect of O’Shea “potentially collecting £4.2m in total pay while they struggle with the price of eggs”. On the other hand, the dividend uplift and £300m of share buybacks isn’t “just a giveaway to City sharks”: Centrica has an army of 500,000 small investors (a legacy of British Gas’s 1986 “Tell Sid” privatisation campaign) and keeping their faith is crucial. There’s another consideration too. “The energy market is in turmoil, with 29 suppliers closing their doors in the last year” – the biggest, like Bulb, involving “opaque” taxpayer-funded rescues. At least Centrica offers stability.
Happily, things may soon start looking up for Britain’s embattled consumers, said Forbes Advisor. Industry analyst Cornwall Insight reckons that “falling wholesale prices” could herald a “return of competition to the energy market from July, enabling customers to switch to cheaper deals”. “The reality is our energy market is rigged,” said Liam Halligan in The Sunday Telegraph – 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.” In theory, this ensures that energy generators cover the costs of production. In reality, however, it allows those firms to make massive profits, while “customer-facing providers pay huge prices for power, which they try to pass on to consumers”. Rather than finger-pointing, what’s needed is “serious” reform of this “marginal pricing racket”.