Support 100 years of independent journalism.

  1. Business
3 February 2022

As bills soar, the future looks bright for Big Energy

Large suppliers with the resources to weather the current crisis will end up with millions of new customers on top-rate tariffs.

By Will Dunn

Ofgem has announced its new price cap this morning, raising the average price of year’s energy supply paid by direct debit on a standard tariff to £1,971 – an increase of more than £693 on the previous price cap, which was implemented in October, and at 54 per cent, the steepest rise in energy bills on record. The cap will come into effect on April 1.

The drastic rise in bills is being driven by a huge spike in the wholesale cost of gas, upon which the UK is dependent for home heating and electricity generation. But while the crisis has caused 29 energy companies, serving 4.4m customers, to cease trading or enter administration in the past year, those that remain are rapidly gaining valuable market share.

Centrica, which owns British Gas (the UK’s largest energy supplier), hasn’t released any financial results since last summer, but in the past six months its market capitalisation has risen by more than £1.5bn, and its net income is now higher than it has been for more than a decade. Some market commentators believe its share price could double this year.

A few years ago, things didn’t look so rosy for Centrica. The problem was competition: having been privatised in the 1980s, the UK’s retail energy market began allowing people to switch suppliers in 1998, and in 2002 price controls were removed. Smaller energy firms entered the market with attractive, cut-price offers, which were pushed to customers by price comparison websites. In 2018 alone, British Gas lost 742,000 customers.

[See also: Why price controls are the best response to soaring gas prices]

British Gas winning those customers back meant taking on two significant costs: offering cheaper deals than the new market entrants and marketing those deals so people knew about them. These costs were high; to acquire three quarters of a million customers through price comparison websites (which typically charge a supplier £50-£80 for a new dual-fuel customer) would have cost tens of millions in fees alone, and as much again in marketing and administration costs.

But thanks to the energy crisis, switching has all but stopped. British Gas – revitalised by Centrica’s new CEO, who improved the company’s balance sheet in 2020 by selling its US business, renegotiating 7,000 contracts and reducing its UK headcount by 1,100 workers, while claiming £27m in furlough – has gained 715,001 domestic and business customers from eight other companies, without having to spend a penny on customer acquisition.

Content from our partners
How do we secure the hybrid office?
How materials innovation can help achieve net zero and level-up the UK
Fantastic mental well-being strategies and where to find them

Shell – which announced this morning that its adjusted earnings had better than quadrupled in the past year, thanks to high energy prices – has also increased its customer base, taking on 536,000 new customers to its Shell Energy brand in less than six months.

Better still, these new customers have not been tempted in by cut-price deals, which lead to a high churn rate as people switch to a new deal after a year. Having been rescued by a supplier of last resort (SOLR) such as British Gas or Shell Energy, they can be moved to a more expensive standard tariff. They could try elsewhere, but those cut-price deals are a thing of the past.

The SOLRs will be reimbursed by the taxpayer not only for the cost of supplying energy to its new customers, but also for the other costs – which it would normally have to pay itself – involved in taking on new customers, such as administration and capital costs. Ofgem agreements show that the regulator has already consented to last resort supply payment claims of over £361m from British Gas.

Robert Buckley, head of relationship development at energy analyst Cornwall Insight, says it’s important to note that the difference between the price cap and the wholesale price means that every supplier is “bleeding profusely”, not only because of the high cost of buying energy in the open market but also because they have to pay for energy in advance, at today’s prices – known as “hedging” – in order to guard against further uncertainty. “They will be hedging now for the next two years at least, and that’s on the assumption that prices stay very high”. Energy companies also take the risk that they might hedge at too high a price, and be left paying above the market rate.

However, the need to hedge against future rises also means that for those that can keep their place in the market, there is a reduced threat of competition from new entrants. Cornwall Insight’s long-term forecast predicts that energy prices will become more volatile in 2026, and continue into the 2030s.

“For those that can manage it”, says Buckley, ”this is a big opportunity to acquire lots of customers in one hit, and have a large part of their acquisition costs socialised across the market”.

The other risk, as far as investors are concerned, is that the government could impose a windfall tax on energy companies or take other measures designed to regulate rocketing bills, as Labour has proposed. The current plan, however, is to do almost the opposite, and extend £6bn in loan guarantees to energy companies, which they will use to lower bills in the short term (and increase them in the long term). This policy is based on the assumption that the spike in energy prices is temporary, but with very little gas storage and nearly half the UK’s nuclear power stations due to close by 2025, this is either a misguided hope or a calculated piece of pessimism (if the government thinks it’ll lose the next election, it might as well put off the bill for the energy crisis to the next parliament).

[See also: Why inflation could break Britain]

Centrica may have hedged against political uncertainty by employing Amber Rudd, who joined the company as a non-executive director last month. There is no suggestion that Rudd’s role will involve lobbying, but as a former energy secretary – and having reportedly had a personal relationship with the current secretary of state for business, energy and industrial strategy, Kwasi Kwarteng – she is certainly well-informed and well-connected.

Major energy suppliers can also find comfort in the fact that there are few things more damaging for an incumbent government than the perception that it cannot keep the lights on. Energy crises unseated the Conservative government in 1974 (when a Gallup poll found 39 per cent of people would emigrate if they were free to do so), the Labour government in 1979, and the governor of California in 2003. Power outages can dent the hardest political strongholds, from the ANC in South Africa to the Republicans in Texas.

In the long term, the biggest worry for the UK’s major energy suppliers is that the government will fail to support the transition towards a more reliably priced, and ultimately cheaper, alternative to gas, in the form of a good mix of renewables. With political opposition to net zero building in the Conservative Party and a Prime Minister that sees deriding environmental protestors as a cheap win, this is a risk we all share.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The New Statesman’s global affairs newsletter, every Monday and Friday. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s weekly environment email on the politics, business and culture of the climate and nature crises - in your inbox every Thursday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A newsletter showcasing the finest writing from the ideas section and the NS archive, covering political ideas, philosophy, criticism and intellectual history - sent every Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.

Topics in this article: , ,