British Gas poised for record profits after Ofgem’s hike in price cap allowances
British Gas is expected to post record profits this week, powered by Ofgem’s decision to temporarily raise allowances for suppliers in the price cap.
The UK’s largest energy firm, which is home to over nine million customers, is on course to report a massive boost in its earnings over the first six months of trading this year, when its owner Centrica unveils its second quarter results on Thursday,
Investec has estimated that British Gas profits could climb to £857m, a stark contrast to the relatively minor contributions Centrica’s retail arm made to its massive profits last year – with the supplier consisting of just £77m of the energy giant’s massive £3.3bn earnings last year.
Such hefty earnings would surpass British Gas’s previous record profits of £585m set in 2010.
Centrica is also expected to sustain its own robust earnings, having recovered from pandemic driven losses – when it posted a £135m loss in 2020.
This follows Ofgem’s decision to hike allowances for suppliers, which are factored into the price cap level to help suppliers cover the cost of supplying energy to consumers, with the aim of supporting market stability.
Previously, these allowances have been raised to recognise rising wholesale market prices caused by exceptional events such as the Covid-19 pandemic and the Russian invasion of Ukraine.
The watchdog has recognised that the price cap was not adjusted in time to ease pressure on suppliers when wholesale costs soared during the energy crisis – which contributed to the collapse of dozens of firms including the de-facto nationalisation of Bulb Energy.
Ofgem weighs up price cap reforms
Ofgem is now considering tightening allowances in line with falling gas prices, meaning suppliers could have to hand money back to customers.
As part of a carrot and stick approach to bolstering financial resilience across the sector, the regulator is also weighing up proposals to raise the fixed 1.9 per cent margin for profits, with a variable rate of around 2.4 cent margins from October.
This would provide a welcome boost for suppliers, which have struggled to turn profits in the past few years, because they have had to shoulder the higher wholesale costs to supply households with energy.
The effect of Ofgem’s reforms to the price cap could also be reflected in second quarter results later this week from French energy giant EDF and Scottish Power owner Iberdrola.
Martin Young, equity and utilities analyst at Investec, predicts that British Gas’ massive profits will inevitably trigger “a media frenzy about energy prices.”
Investec expects higher prices for energy bills will persist well into next year, prolonging the cost-of-living crisis, with the price cap still nearly double pre-crisis norms.
Young forecast that the typical household energy bill will remain around the current level at around £2,000 per year through the third quarter of 2024.
While this is “slightly lower than our previous estimates, it’s hardly a respite,” he argued.
Cornwall Insight has also predicted the price cap will remain well above pre-crisis levels into next year, prolonging the country’s cost of living crisis.