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Simon Henderson

Energy profits and energy prices: why can both rise?

24 February 2011 Posted by Simon Henderson, Corporate Responsibility     1 comment

When profits go up, prices should go down, right? I'm afraid not.

The profits we announce are calculated based on what we have spent (operational costs) vs the revenue we have received in the last year. This is historical information, looking backwards.

But we don't calculate energy prices for our customers based on what energy prices were last year. We calculate prices based on the cost of energy now and in the future, as well as whole range of other factors. We buy much of our gas and electricity in advance, sometimes as much as two years ahead.

So our pricing strategy is based on the future, while our profit announcements are a measure of our past performance.

Why do we need to make a profit?

At a basic level, without being profitable we are not going to attract the huge amounts investment we need as a business to secure Britain's future energy needs. Without profit, we would not be able to do any of the following:

  • Invest in keeping the nation's lights on in the future with clean power stations and wind farms
  • Invest in our customers' homes, helping them use less energy and keep their bills down
  • Continue providing secure, skilled jobs for the 30,000 people we employ here in Britain
  • Fund the 500 apprenticeships we provide each year, or the 2,600 new roles we will be recruiting to this year

We are currently investing £1.60 for every £1 of profit that we make.

Graph showing Centrica's profit compared to investment

So what's a reasonable level of profit to make?

While British Gas' £740 million profit is a lot of money in absolute terms, once we have paid tax on that it would take 10 years of profits at that level to build just one new nuclear power station. The country needs ten. It is also worth remembering that British Gas serves half the homes in Britain, and, while many people will find this hard to believe, our profit works out at only around £4 per household each month. 

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