How are British Energy Companies Making so Much Money?
With British energy companies and their record profits dominating the news right now, many of us are left wondering how they’re doing it. August’s price cap sadly confirmed average energy bills are going up to a record high of £3,549 per year, meaning many UK households are facing a bleak winter.
We’re looking at how exactly these British energy companies are recording their highest profits in years while consumers are left choosing between heating and eating.
What do we Mean by British Energy Companies?
When talking about British energy companies, we’re not talking about British-run companies, as many of the largest energy companies operate around the world. BP and Shell, for example, are in the global market but still provide oil and energy to the UK. For the purposes of this article, we’re referring to the energy companies operating in Britain.
The UK energy market has been dominated by the “Big 6” for a long time. To put it simply, these are the largest energy companies in operation. The Big 6 are:
|Company||Customer Base (millions)|
Along with the Big 6, there are other “small suppliers” that have seen an increase in popularity. With over 60 energy firms going bust recently, these smaller options aren’t so small anymore and need mentioning:
|Ovo Energy||1.5 million|
2022 has seen some of the UK’s largest energy companies report record-breaking profits. Documents suggest energy firms will make up to £170bn in profit over the next 2 years. Of course, this figure is just speculation, but we do have legitimate figures from some energy companies.
Shell reported nearly £10bn in profit for April-June 2022. This follows their healthy £7.3bn takings from January-March.
It’s a similar story for Centrica, which owns British Gas. Their recent announcement confirms they recorded £1.3bn in half-year group profits in 2022. This is nearly 5 times more than the £242m they recorded the year before.
The numbers are staggering, but these are giant companies with several parts to their organisations. Selling household energy is only a very small part of what they do and isn’t necessarily responsible for the huge profits.
So, what about the British energy companies supplying our power? Are they making a profit like the oil juggernauts, or is it a bleaker picture for them, too?
Are Suppliers Making Profits?
We’ve got figures from some of the largest energy companies and many are making bigger profits than last year. The following figures are based on the first 6 months of 2022 and are pre-tax and interest:
- Eon: £245m. A 77% increase on the previous year
- EDF Energy: £728m. A 200% increase on the previous year
- Scottish Power: £924.6m. A 2.6% increase on the previous year
It’s not totally clear cut, though. Some of these profits are based on other factors, such as wind turbines creating more income for Scottish Power and nuclear plants for EDF.
It’s also worth noting Octopus Energy. The company spent £150m helping their customers through the energy crisis and is now recouping some of its losses. It’s halved losses from £63m to £31, as of April 2021.
Unsurprisingly, the figures have left many UK residents wondering why they’re worried about affording their bills while energy companies are making more money than ever.
How are British Energy Companies Making so Much Money?
While it’s painful to see our energy bills increasing every 3 months, there’s more to the story of record profits than household supply alone. As with supply and demand in all markets, the higher the demand for something, the further the cost increases.
We’re in a delicately poised global situation at present, with some unprecedented and unpredictable factors at play. These include:
- The Russian invasion of Ukraine
- China’s increase in energy consumption following Covid
- Russian gas pipes, such as the development of Nord Stream 2
- Maintenance of UK’s ageing Nuclear power plants
- Lack of gas storage capabilities in the UK
- Fractured trade relationships
It’s led to a huge increase in the demand for energy, but the drastically reduced ability to supply it means companies can now charge a premium.
The cost of a barrel of crude oil currently sits at around $96 (£83), which is a substantial increase from the $72 (£59) it was a year ago. The volatile market means it’s much easier for oil traders to profit from buying and selling crude oil.
Many of the largest energy companies have thousands of traders doing exactly this, buying oil and selling it on for a profit, helping to rake in the money. The firms themselves would also argue they’re running more streamlined operations following the oil price collapse in 2020. By working with experienced business consultants in the energy and utilities arena, they’ve saved millions through more efficient operations.
All the elements combine together to produce the perfect storm for profits. But what about the majority of the population who are at home wondering how they can afford their energy bills this winter? Is it fair to see the bosses of British energy companies taking huge bonuses home when fuel poverty is rife? Let’s consider ways to move forward.
What are the Options Moving Forward?
It may come as a surprise to learn the energy price cap limits energy firms’ earnings to £35 per household. So the British energy companies are clearly making the majority of their profits elsewhere. If we can’t cut the bills, what options are available to help us keep our homes warm this winter?
With a brand new Prime Minister in situ, speculations are rife. It’ll be a little while before we know the solid plans, but some suggestions are:
- Windfall tax – a one-off levy for businesses with unexpectedly high profits
- Cutting VAT on energy bills
- Re-nationalising energy companies
- Government to fund the next energy cap rise
- Additional energy-reducing measures in homes
With October 1st looming and increased fears over the cost increases, let’s hope plans are announced soon.