British Gas has unveiled a bumper 58% jump in annual profits just days after the energy regulator revealed an increase in suppliers' profit margins over the past few months.
The energy giant says its operating profits rose by £219 million to £595 million during 2009, thanks to the falling wholesale cost of gas and electricity.
Despite these lower costs, Ofgem, the energy regulator, reports that the net margin for a typical standard dual fuel customer rose by £30 during the three months to February 2010.
British Gas is the only energy supplier to cut bills this year – it unveiled a 7% reduction to gas bills after the freezing weather during January provoked record demand for gas.
There is now mounting pressure on energy companies to pass on the benefits of lower wholesale costs to customers. Ofgem says that if other major suppliers respond to the move by British Gas, this could cancel out the increase in margins.
However, in its profit announcement, British Gas warns that wholesale energy prices are set to rise this year. In addition, all energy suppliers face the prospect of having to make massive investment in infrastructure and environmental targets in the years ahead – and it is feared these costs will be passed onto customers.
Ofgem has previously forecast a 60% spike in energy bills over the next decade.
But Andrew Wright, senior partner for markets at the regulator, says short-term cuts are still possible: “Although we expect energy prices to rise in the longer term to pay for the up to £200 billion investment, which is needed to secure supplies and reduce carbon emissions, we would also expect recent falls in wholesale energy costs to be passed on to consumers.”
British Gas admits that any immediate rise in wholesale prices are unlikely to be as severe as those seen in 2008.
“Wholesale UK gas and electricity prices both declined sharply [in 2009] from the levels seen during 2008 and while the forward curve indicates that they will rise again during 2010, it is clear that we are in a very different commodity price environment from that experienced in 2008,” says Roger Carr, chairman of British Gas.
British Gas hiked gas bills by 50% and energy bills by 24% in 2008 in response to rising crude oil prices. In 2009, when these costs started to fall back, it reduced both gas and electricity bills by 10% - a move that saw its customer base grow by 164,000.
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Mike O’Connor, chief executive of watchdog Consumer Focus, says: “At a time when householders are worried about their winter energy bills, they will no doubt wonder why margins have increased for the fifth quarter in a row, while wholesale costs continue to fall.
"The answer seems to be depressingly simple – energy companies are pushing up their profits by cashing in on the cold spell."
uSwitch.com estimates that household energy bills are around £281 higher than just a couple of years ago.
Its director of consumer policy, Ann Robinson, says the spotlight is now on the energy supplier’s five main competitors: “British Gas has now cut its prices for the third time in 12 months and the fact remains that it is still the only supplier to have reduced prices this year.”
However, she warns there are still no guarantees that bills will be cut across the board. Even if they are, the cost of energy remains high following the giant hikes introduced in 2008.
Mark Greening, head of utilities at Gocompare.com, adds: "All the major energy providers have enjoyed the benefits of the drop in wholesale energy costs but have been slow to pass the savings on to customers.
"To be fair to British Gas, it has at least made cuts of late, while the majority of the other providers have hung on, presumably until the winter bills are all paid."