The obscene profits of the energy industry show the sector is broken
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
This week the UK household energy bill has risen to an average of £1,849 a year, an increase an increase of £111 since the previous quarter. In October 2020, the average household bill was £1,042 though it hit £2,500 in April 2023. The energy price cap, set by Ofgem, limits the amount suppliers can charge households for each unit of energy and daily standing charges, but it doesn’t cap the total bill.
Just six energy companies control over 90% of the UK energy market, and in the absence of effective competition people are routinely fleeced. Between 2020 and April 2025, 20 energy companies dominating the UK energy industry reported operating profits of over £514bn, which fuels inflation, poverty, misery, premature death and industrial stagnation. Since the pandemic electricity and gas supply companies have increased their profit margins by 363%, electricity generation companies have increased their profit margins by 198%. The industry still receives public subsidies.
Record profits by BP. Shell, British Gas and the National Grid are a reminder that energy sector regulation has failed. The real profits are likely to be much higher than the numbers shown in company accounts because it is not uncommon for energy producers to inflate costs through intragroup transactions and shift profits to low/no tax jurisdictions. Energy companies speculate on the price of their own output to push up prices. BP alone employs more than 3,000 traders to do that. Shell has a trading division but does not reveal details. Energy producers make billions from such speculation, and none of that is subject to any periodic windfall tax on oil and gas companies. Banks also profit from energy price speculation through trading in futures and other derivatives. This is distinct from profits made by energy suppliers and retailers but can hike market prices which form the basis of customer bills.
The UK has the fourth highest electricity price in the world for households. With average real wage unchanged since 2008, the social consequences are stark. Some 6.1m households are in fuel poverty, compared to 4.5m in 2021, and struggle to heat their homes to keep warm and healthy. Some 128,000 Britons a year, including 110,000 pensioners, die in fuel poverty. High energy bills reduce disposable incomes for purchase of other essentials. Some 7m Britons are unable to pay utility bills. Some 3m people are malnourished or at risk of malnutrition. Due to lack of nutrition, UK children are getting shorter and experiencing more ill health than their European counterparts.
For industrial electricity, British businesses pay the highest electricity price in the developed world, more than twice the EU average, 2.6 times that of Korea and four times more than the US. Energy cost in China has less than a quarter of the UK cost. Profiteering by energy companies has handicapped industries such as steel, shipbuilding and engineering and they increasingly struggle to compete. The future of electric vehicles, manufacturing and AI looks precarious.
The UK produces around 34% of its electricity from gas and governments blame the Russia-Ukraine war for higher energy price. This is just another way the state shields the energy sector. In June 2022, the UK ceased importing oil, gas and coal from Russia though scarcity can escalate market prices. Around 50% of gas used in the UK is home produced. The UK gas prices are below the median for industrialised countries, 17% lower than France and 10% less than Germany but they have lower energy costs. The real problem is unchecked profiteering and ineffective regulators.
Ofgem Facilitates Profiteering
One of its non-executive directors resigned and said that the regulator “gave too much benefit to companies at the expense of consumers”.
The main culprit is the Ofgem’s “marginal cost pricing” system which determines consumer prices showers excess profits on companies. Marginal cost is the cost incurred in bringing one additional unit of gas/electricity to the market. When applied correctly, it can lead to efficient use of resource allocation. But there are problems with Ofgem’s assumptions. Energy supply is not a market in the classical economic sense. People must buy energy. They are captive customers who have to pay whatever the prevailing price is. There are no effective substitutes. In a competitive market (where there are many buyers and sellers and everyone is a price taker), firms compete and that drives costs to marginal levels i.e. the cheapest option and sets a price that enables suppliers/producers to recover all costs associated with production. The firms unable to produce goods/services at that level will not be able to sell and will go out of business.
Energy is produced from various sources (such as gas, oil, nuclear, wind, sea, hydro, solar, biomass, etc.) and all elements are mixed and transmitted by the generating stations. The customers cannot distinguish how much of their energy is from gas, oil, coal, wind, nuclear or solar, etc. as electricity from one source is as good as any other. However, each input source has a different cost structure. For example, currently gas costs the most and nuclear, hydro and renewables cost considerably less.
The Ofgem cap does not calculate ‘cost’ based on each variety of input. It is not based on average cost or weighted average of all inputs either. One of the Ofgem’s objectives is to ensure profit for each supplier at each stage i.e. generation, transmission, distribution and retail. This means that the Ofgem cap has to be set at the most expensive price/cost per unit. Otherwise the marginal producer (the most expensive producer) cannot make a profit. This is reverse of what happens in competitive markets where the most expensive supplier is driven out of business.
This is a boon for companies providing oil, nuclear, renewables, solar and hydro and other forms of inputs because they are paid the price of energy generated by the use of gas, which currently is the most expensive input. The cost incurred by domestic producers of gas is considerably less than the wholesale market price, but that does not enter into Ofgem calculus, and consumers bear the brunt.
Ofgem guarantees profits to household energy suppliers. The current rate is 2.4% of the Earnings before Interest and Taxation (EBIT) though most make more than that. There are no limits on the profits made by producers, wholesalers and transmitters of energy though governments may claw some of that back through windfall taxes. In 2022-23, the UK government levied puny £2.6bn windfall tax on oil and gas companies, rising to £3.6bn in 2023-24. The bills received by customers do not show the wholesale cost of energy, network costs, operating costs, various levies, distribution and billing costs, profit or anything else even though companies and Ofgem have full details. The lack of information stifles debate and continues to facilitate exploitation.
A handful of companies control the UK energy industry and their obscene profits show that the sector is broken. Their profiteering is a major cause of inflation, poverty and economic stagnation. The price of energy affects cost of every other sector and makes its uncompetitive. No government can develop an effective industrial strategy without ending profiteering in the energy sector. In countries such as France, Germany, the Netherlands and Denmark industrial strategy is built around public ownership on energy. This gives the state additional levers for protecting the people, controlling business costs and inflation, and promoting industry. Successive UK governments have opposed public ownership of energy but are content to let foreign state-owned companies to control the energy sector. For example, between 2020 and 2025 EDF (Électricité de France) owned by the French state made £91bn operating profit in the UK, which subsidises French households and industry. Indeed, the UK remains obsessed with privatisation. Nearly half of all the UK’s offshore wind capacity is owned by state-owned or majority state-owned foreign entities. Vast export of profits lubricates foreign economies and prevents the development of suitable technologies at home.
The UK must bring energy infrastructure back into public ownership to protect people and rejuvenate the economy.
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