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.