Left Foot Forward
The obscene profits of the energy industry show the sector is broken
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.
Energy industry profits hit half a trillion pounds while bills soar – and Labour members show their frustration
Energy companies have pocketed over £500 billion in profits since the energy crisis started according to an updated analysis of company reports.
Researchers working for the End Fuel Poverty Coalition examined the declared profits of firms ranging from energy producers, such as Equinor and Shell, through to the firms that control our energy grid, such as National Grid and UK Power Networks, as well as suppliers, such as British Gas.
As energy prices are set to increase by 6.4% this week for households across the country, the analysis shows that almost half of the total profits since 2020 (£207bn) are generated by firms with extensive involvement in the gas industry.
The cost of every unit of gas used will surge by over 10% from 1st April, meaning the cost of gas is now double what it was in winter 2020/21. The cost of gas affects not only households’ ability to keep warm, but also sets electricity prices up to 40% of the time under energy market rules.
Also profiting are the firms and business units responsible for electricity and gas transmission and distribution. These are the “network costs” consumers pay for maintaining the pipes and wires of the energy system and are usually paid for through standing charges on energy bills.
Earlier this year, Citizens Advice found that these firms had made an estimated £4bn in extra profits after a “misjudgement” by regulator Ofgem. Previous research also found that the same firms underspent on vital grid improvements by almost £1bn.
Simon Francis, coordinator of the End Fuel Poverty Coalition, commented: “As energy prices remain at levels way above the 2020 benchmark, the energy industry is taking us for April fools. We need politicians and regulators to act to bring down energy bills now.
“This means radical reform of the electricity pricing markets, investment in homegrown renewables and taking on the vested interests of an energy industry which makes billions of pounds of profits every year at consumers’ expense.
“In addition, we need to see steps taken immediately to help households reduce energy consumption in a safe way, by improving energy efficiency of buildings. This is why MPs need to push the Chancellor to commit the full £13.2bn funding needed for the Warm Homes Plan through the Comprehensive Spending Review.”
Maria Carvalho, from Medact which represents frontline health workers, commented: “The record-breaking profits of energy giants come at an unbearable cost to public health. Cold homes cause illness and drive patients into already overwhelmed NHS services, while energy debt traps families in a cycle of financial and mental distress.
“Every pound pocketed by these corporations is a pound that could have kept someone warm, well, and out of hospital. The government must act now to rein in energy profiteering and invest in a fair, sustainable energy system that protects health rather than harming it.”
Jonathan Bean from Fuel Poverty Action added: “Without radical reforms, millions of us will continue to suffer and die in energy starvation due to inflated energy pricing. We are not getting the benefit of our increasing supply of cheap renewable energy.”
Warm This Winter spokesperson Caroline Simpson said: “Frankly this is shameful. It’s incomprehensible in so many ways and plain wrong that a mere 20 companies have made so much money out of people’s misery. The industry can spare a few of their many billions to bring down bills, pay for energy-efficient homes and switch from oil and gas to save the planet.
“Now more than ever, we need to give everyone in the UK the peace of mind that comes with having energy security from homegrown solar and wind so we’re not at the mercy of either profiteering oil and gas companies or hostile countries.”
Labour backbench MP Zarah Sultana tweeted: “Since 2020, energy giants have made £514,000,000,000 in profit while bills soar. Meanwhile, UK billionaires hoard £795,000,000,000 as 4.5 million children live in poverty. If the government wanted to tackle poverty & lower bills, it would tax billionaires and nationalise energy.”
She added: “Energy bills up 6.4% — while network providers raked in £4 billion in “excess” profits over four years. Water bills up 26% — while firms paid £78 billion in dividends since privatisation & racked up £64 billion in debt. End this scam. Bring water and energy into public ownership.”
Ian Byrne MP agreed, tweeting: “‘Energy giants rake half a trillion in profits while households’ bills go through the roof. This rip-off cannot continue. We need state ownership of energy and water.” Former Shadow Justice Secretary Richard Burgon MP agreed.
Two-thirds of Labour members want a change of course
As rising utility bills intensify the cost of living crisis and drive more people into poverty, while record profits are made by the energy companies, pressure is mounting on the Government to deliver the ‘change’ it promised last July. A new survey by Survation found that two-thirds of Labour members felt the Party was heading in the wrong direction.
In a league table of Cabinet favourites, Ed Miliband and Angela Rayner came top, while Keir Starmer himself came third from bottom, ahead of Work and Pensions Secretary Liz Kendall and austerity Chancellor Rachel Reeves, who had a -41% rating.
“Starmer’s project is failing,” noted Momentum. “We need real Labour values to fix the crises in Britain, not more austerity.”
Image: https://milestonemagazine.com/3-global-businesses-that-have-thrived-during-the-pandemic/ Licence:Attribution-ShareAlike 3.0 Unported CC BY-SA 3.0 Deed
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