Britain’s biggest energy company has warned the government about the dangers of “unintended consequences” if ministers make a fresh intervention to drive down household bills.
Iain Conn, chief executive of Centrica, said he would welcome “constructive dialogue” with business secretary Greg Clark in the wake of a report claiming the “big six” energy companies were making bigger profits than previously thought.
But Mr Conn insisted there was no truth in a claim in the Sun newspaper that energy companies were making profit margins of up to 24 per cent on their standard tariffs.
“I’m worried about intervention because I don’t think it is necessary, and it could have unintended consequences,” he said. Centrica’s profit margins over the past six years had been between 4 and 6 per cent, he said, in line with the industry average of 4 per cent according to regulator Ofgem.
The big six have been braced for more state intervention since Prime Minister Theresa May told the Conservative party conference last month she would use the power of government to intervene in several markets, including energy. “It’s just not right that two-thirds of energy customers are stuck on the most expensive tariffs,” she said.
Mr Clark ramped up the rhetoric further on Monday, saying that the Sun report appeared to confirm that the big six were “punishing their customers’ loyalty”. He will hold talks with energy companies in the coming days to discuss the situation.
Ministers are understood to believe that proposals this summer from the Competition and Markets Authority, which stopped short of market-wide price controls, did not go far enough.
Monday’s front-page newspaper article was based on a report in June by PwC, the professional services firm, for Energy UK, which represents Britain’s major power companies. It claimed that the report showed companies making a profit margin of up to 24 per cent on standard variable tariffs.
That figure was reached by calculating the gap between the most expensive standard variable tariff for a dual-fuel bill at an annual £1,172 — from Npower — then subtracting the figure of £844 per household for typical costs.
But Energy UK said it was “bewildered” by the interpretation of its own report and said it did not recognise the “illegitimate calculation”. “This is confusion and obfuscation . . . to come up with the figure of a 24 per cent margin on the basis of our report, you cannot do that,” it said.
The group explained that it had produced a “dummy average bill” for one purpose alone to demonstrate that, despite a fall in wholesale prices, companies were having to pass on much higher environmental and social policy costs to consumers. “It is simply a way of demonstrating how pressures on energy bills have changed over recent years,” it said.
This example bill should not have been seen as the industry average for costs per household, Energy UK said. Meanwhile, the group pointed out that the report had accentuated the gap between costs and bills by focusing on standard variable tariffs, the most expensive type.
Mr Conn of Centrica said the PwC figures appeared to underestimate certain costs such as corporation tax, the cost of collateral for energy hedges and some service costs.
However, consumer group The Big Deal said the figures were “shocking”, given that many people had been stuck on such deals for years on end.
“It’s depressing but not surprising that it has only come to light thanks to a leaked report,” said Will Hodson of the group. “We need much more transparency. The profit margin for every big six tariff should be published in full.”
The Competition and Markets Authority initially found in 2015 that the big providers were overcharging customers by £1.7bn a year and proposed a temporary price cap.
But in its final report, published the day after the EU referendum in June, it said that should only be applied to people on pre-payment meters.
Ministers are considering new policies to help people stuck on expensive energy tariffs to move to better deals. While a third of consumers shop around for cheaper energy bills, the remainder typically stay on more expensive floating rates.
Solutions could include an extension of the price cap on pre-payment meters to other vulnerable groups, automatic switching of people to cheaper rates after a certain period, or a limit on the tariff increase allowed after a fixed-price contract expires.
However, previous interventions have had a mixed impact. David Cameron, former prime minister, promised in 2012 that all consumers would be put on the cheapest possible tariff, something that did not quite materialise.
Keen to up the stakes, his opposite number Ed Miliband vowed a year later that a Labour government would oversee a freeze in energy bills for all households. That prompted many energy companies to hedge their positions, making it harder for them to pass on to consumers the subsequent fall in wholesale prices.
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