Yes, my energy company makes a profit. So what?

Time for a more objective debate.

Last week the Labour Party released figures highlighting that the major energy companies collectively had made increased profit levels from their generation and supply businesses since the last general election.  This theme is one that requires an objective public debate as the UK faces up to the energy challenges that lie ahead.

I understand that some people, many of whom may be Labour Party members, believe that utilities – like the company I lead – should never have been privatised and so any level of profit is unacceptable.  That’s a perfectly legitimate view to hold, but it is not the policy of any leading political party.  For as long as energy companies are privatised and shareholder-owned companies we are required to pay our shareholders a return on their investment.

That being so, surely the real question – if I may be so bold – is: what level of profit is reasonable for a publically listed energy company to make? Clearly we provide a vital service and so we cannot make unfettered profits.  But we have been very clear for some time now that in domestic energy supply we target a profit margin that averages just five per cent over the medium term.  Recent polling suggests that most people think that is a reasonable amount to make. Indeed, it’s a smaller margin than most food retailers and in recent years our Energy Supply business has made less than that. The overall profits might seem high, but they come from almost ten million customer accounts.

Labour looked beyond supply and also examined the generation side of our businesses.  It’s true that profit margins here can be higher but they are absolutely necessary to support inherently riskier, more complex investments like power stations. And why do we need that investment? To deliver on the energy policy commitments of this government and the ones before it.

For years now energy policy has been aimed at decarbonising the UK’s energy system. The Climate Change Act of 2008, supported across the political spectrum, requires slashing carbon emissions by 80 per cent on 1990 levels by 2050. To do this without drastic changes to all of our lifestyles, most of the burden of this will fall on the electricity generation sector, where highly polluting power stations will have to close and be replaced with more expensive, low-carbon alternatives. I don’t disagree with this aim – quite the opposite – but politicians, the media and indeed the general public must all confront the fact that these policies come with a price tag.

Once you bring in necessary upgrades in the regulated transportation infrastructure, oft-quoted government estimates put the amount of private sector investment needed by 2020 at as much as £110bn. Whatever the final sum, it will require an awful lot of investment decisions to be made. And if each individual investment does not stand alone economically, it cannot be undertaken. Therefore the sheer increase in volumes of this investment will mean that, even if profit margins per investment are not increasing, the absolute level of profit will have to increase. It is a simple fact of economics.

Where the profit then goes is also critical. At SSE we are proud to invest only in the UK and Ireland, and we use the British supply chain where we can too, such as the £500m we put into it when developing our Greater Gabbard wind farm off the Suffolk coast. As a UK-listed company we pay tax on our profits here in the UK (£369m last year), we employ around 20,000 people across the UK and Ireland – many in remote areas where such jobs are invaluable to the local economy – and we also invest in R&D, skills, training and apprenticeships.  

I accept we have a unique role in the UK society and with that privilege comes responsibility. I have also been around long enough to know that Labour’s focus on the big energy companies is a fact of political life in a functioning democracy, but this over-simplification of profits failed to take account of how this profit underpins vital investment and services that help the country to function.  I am not pretending SSE or other companies are perfect, but that must not stop us from having a genuine debate around the future of energy in the UK and how we are going to pay for it through proper economic investment.

For customers, higher group profits will clearly be difficult to reconcile with the increases they have seen in prices in recent years. But this debate is too important to be reduced to just prices versus profits. For all the investment we make, we estimate that only 15 per cent of a typical bill is within our direct control. It’s time for government, opposition and industry alike to have an open, objective conversation about how to meet the challenges ahead of us while protecting customers from rising costs.

Photograph: Getty Images

Alistair Phillips-Davies is Chief Executive of SSE plc

Show Hide image

Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.