Power company profit figures dont take investment into account, says energy industry
Power company profits have risen by nearly three quarters in just four years, according to headlines in today’s papers. But the energy industry says the calculation – which comes from the Labour party – doesn’t give the whole story.
The so-called big six energy companies have something of a stranglehold on the energy industry in this country, providing 98 per cent of households in Britain with gas and electricity. But as energy bills rise, there’s been a lot of criticism of their profit margins – and even accusations of ” cold-blooded profiteering” from pressure groups.
Today’s story is based the Labour party’s calculation that the big six made a total profit of £3.7 billion in 2012. That’s 73 per cent more than the profit it calculated for 2009.
Adding it up
Labour used data from the energy companies, publicised by UK energy regulator Ofgem. It requires the big six energy companies to publish information every year about their profits, underlying costs and revenue flows in order to improve transparency.
Here are the numbers in a bit more detail:
Image - Screen Shot 2013-08-09 At 09.37.12 (note)Source: Labour party press release. Using data from Ofgem – publication of 2012, 2011, 2010 and 2009 segmental generation and supply statements by energy companies
Labour calculated the £3.3 “windfall profit” figure by totting up all the extra money the companies have made as a result of rising profits since 2009 (see final column).
Inaccurate numbers?
Industry group Energy UK disagrees with Labour’s assessment, however. Its chief executive, Angela Knight, says:
“[Labour’s claim is ] disappointing and inaccurate bashing of an industry which brings heat and light to 27 million homes and business â?¦ If a company is to stay in business it has to make a profit. And the more a company has to invest then it has to make more profit to do so”.
Labour totted up the so-called earnings before tax and investment, or ‘ebit‘ figure, for each of the big six energy companies, for each of the relevant years. Energy companies make money from both generating energy, and further down the chain from selling to it to consumers. Labour added up the profit the companies make from both generation and supply.
But Knight tells Carbon Brief that this is inaccurate because the profit figures are gross, not net. In other words they ignore the money that energy companies have to invest in new infrastructure and the money lost in tax. More contentiously, Knight also suggests the industry’s benefits to the wider economy should be taken into account. She says:
“The figures ignore the money ploughed back into the UK economy in a variety of forms – including generation of energy and job creation”.
Investing to make a profit
Taking a deeper look at the mechanics of the argument, Labour’s figures aren’t correct because they ignore all the money the industry has to pay out on building and maintaining energy infrastructure, according to Knight. In other words, energy companies have to make money to spend money.
In strictly technical terms, this is probably right – according to the Oxford English Dictionary profit is comprised of the difference between the amount earnt and the amount spent on “buying, operating or producing something”.
But how much money is the energy industry investing in infrastructure? The government is expecting energy companies to spend billions on new low carbon infrastructure over the next couple of decades, but there’s not much sign of it so far. Labour pointed us to recent figures from Bloomberg New Energy Finance, showing that while profits have been going up last few years, clean energy investment has been falling.
It’s hard to work out from these numbers how much profit energy companies really make. Labour’s figures show how much money the sector is making from generating and selling energy – but the industry argues that it needs that money in order to reinvest for the future.
Energy company profits are notoriously opaque – and in the face of a sceptical public, the industry is probably going to continue facing questions about quite how much money it really is making.