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British Gas predicts fall in energy bills British Gas predicts fall in energy bills
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Household bills at British Gas will be about £90 lower this year than in 2013, thanks to mild weather and a freeze on energy prices. Britain's largest domestic energy supplier, Centrica, has clashed with Ofgem over the regulator's claim that the industry was likely to double its profits over the next 12 months.
Parent company Centrica blamed the warm weather in Britain for a 35% drop in overall operating profits to £1.03bn in the first half of the year, with British Gas residential profits falling by 26% to £265m. Also taking a toll was the polar vortex, "extremely cold weather" in North America which wreaked havoc in wholesale markets and cost the company an extra $110m (£65m). Centrica, which issued three profit warnings this year when it was losing an average of 2,200 customers a day, is predicting a return to growth next year. It said customer numbers have now stabilised. The owner of British Gas said its household supply arm had recorded a 26% slump in profits in the first half of 2014 and there was no chance of a turnaround over the next year.
Britain's largest energy supplier said the warm weather had reduced the average household's consumption of gas by 24%, which is likely to result in a £90 drop in the average British Gas bill this year from 2013 (a 7% fall). It put energy prices up by 9% last November and cut them by 5% in January as wholesale costs fell, leaving prices 4% higher than last year on a net basis. Following a similar pledge from rival SSE, Centrica vowed in May not to raise prices again this year. "We have 25 independent analysts following the company, and if you look at their forecasts for 2015, there isn't a single one who is forecasting that profit margins will double or anything like that," said Centrica's financial director, Nick Luff.
Asked whether there was scope to cut prices, Nick Luff, the finance director, declined to comment before adding: "That's always the case. The wholesale cost of gas is clearly lower than it was." Household bills at British Gas are predicted to be about £90 lower this year than in 2013, thanks to mild weather and a freeze on energy prices, said the company. It has lost 600,000 customers over the last year but still reported first half retail profits of £265m and Centrica group operating profits of just over £1bn.
Rick Haythornthwaite, the chairman, said: "The first half of the year has seen challenging market conditions across the group, both as a result of the weather and reflecting the wider political environment. We have continued our efforts to engage with our stakeholders, particularly our customers, working to restore their trust. And we are taking the steps to position the business for growth in 2015 and beyond." Ofgem said this week that its latest monthly estimates showed overall industry profits are likely to rise to £106 per household over the next year, up from £53 over the previous 12 months. British gas serves 11m homes.
Chief executive Sam Laidlaw is leaving at the end of the year and will be replaced by BP refining boss Iain Conn, who is taking on one of the toughest jobs in the business. Centrica and other energy companies have been accused of profiteering as household bills soared in recent years, and the new watchdog, the Competition and Markets Authority, has launched its widest investigation into the sector to date, which will take up to two years to complete. Luff, who will leave later this year as will Centrica chief executive Sam Laidlaw, said Ofgem had been wrong in the past and noted that Centrica's forecast was based on actual consumption whereas the Ofgem used a "theoretical model".
Energy regulator Ofgem is now predicting that suppliers will double their profit margins and make a profit of £106 a household over the next 12 months. Jonathan Reynolds, Labour's shadow energy and climate change minister, disagreed. He said Ofgem's forecasts for the industry for the next 12 months was the latest example of an energy market that was not working. "Britain's hard-pressed bill payers have seen their energy bills rocket, despite falling wholesale costs. That is why Labour would freeze energy bills until 2017 so prices cannot rise, and create a tough new watchdog with the power to force energy companies to cut their prices when wholesale costs fall."
Luff said: "It's hard to see that in our results that we published this morning." Centrica expects to make a profit of £40 per household (£51 before tax) in 2014 – 20% lower than last year. He suggested that Ofgem had been wrong in the past and noted that Centrica's forecast was based on actual consumption whereas the Ofgem used a "theoretical model". Richard Lloyd, executive director of consumer group Which?, said: "British Gas profits are down because of a warm winter, not lower prices. Energy companies must do everything they can to pass on any savings to their customers including falling wholesale and network costs."
Meanwhile, Jonathan Reynolds, Labour's shadow energy and climate change minister, said: "Ofgem's forecasts for the industry for the next 12 months is just the latest example of an energy market that is not working. Britain's hard-pressed bill payers have seen their energy bills rocket, despite falling wholesale costs. The energy sector is the subject of a wide-ranging investigation into profiteering by the Competition and Markets Authority (CMA). Luff said Centrica has held meetings with the CMA and had its own small team working full-time on the inquiry but insisted the company was "not fearful" of the outcome of the investigation, which could lead to Britain's big six suppliers being broken up. SSE, ScottishPower, Centrica, RWE npower, E.ON and EDF Energy control about 96% of the market.
"That is why Labour would freeze energy bills until 2017 so prices cannot rise, and create a tough new watchdog with the power to force energy companies to cut their prices when wholesale costs fall." Luff noted that Centrica had put three gas-fired power stations up for sale two months ago and scrapped plans for an offshore windfarm, the Celtic Array off Anglesey.
Luff said Centrica has had meetings with the CMA and stressed that the company was "not fearful" of the outcome of the investigation, which could lead to the big six suppliers being broken up. He noted that Centrica had put three gas-fired power stations up for sale two months ago. "We are confident our business model works." He said he would be leaving without regrets that Centrica should have done things differently despite mounting criticism from fuel poverty campaigners in recent years. "We coped with quite dramatic changes in the shape of the energy market," he said.
Luff, who is also leaving the company after seven years at Laidlaw's side, said defiantly he "wouldn't go back and change anything" – despite mounting criticism from fuel poverty campaigners in recent years. "We coped with quite dramatic changes in the shape of the energy market." Centrica's chairman, Rick Haythornthwaite, paid tribute to the "exceptional leadership" of Laidlaw, who will be replaced by BP executive Iain Conn.
Centrica is in talks with the government amid growing fears that the west's stand-off with Russia over Ukraine could undermine an important power deal, the Guardian revealed on Wednesday. Under the contract, estimated to be worth hundreds of millions of pounds, gas from state-owned Gazprom is scheduled to start flowing from October. Luff played down the size of the contract, saying Centrica had "much bigger contracts" with Norway's Statoil and Qatargas. Figures from French-owned EDF – another of the big six suppliers, serving 4m households – showed that operating profits in Britain rose 9.5% to £560m for the first half of the year. It said the growth was the result of higher output from its nuclear power stations, compared with a period last year when more of its generating capacity was out of service for planned maintenance. EDF said a decline in gas sales due to milder weather was partly offset by 3.2% growth in customer accounts.