The claim

“British Gas spends more on what’s called the Warm Homes Discount, which is to help those most in need, so those are choices we make but they are made from the 5 pence margin that we generate.”
Phil Bentley, British Gas managing director, 12 October 2012

The background

British Gas and its parent company Centrica were back in the headlines today after announcing another rise in fuel prices.

Customers of the UK’s largest energy supplier will face an average excess charge of 6 per cent on gas and electricity, adding about £80 a year to a typical dual fuel bill.

The news comes less than three months after British Gas Residential announced profits of £345m in the first half of the year – up 23 per cent year-on-year.

The company claimed this was all about bouncing back from record lows – but we FactChecked them and found them wanting.

What’s the story this time?

The analysis

There’s no dispute that British Gas is making handsome profits at the moment, but in the energy sector profits can go up and down pretty dramatically throughout the year.

By the end of the year, according to managing director Phil Bentley, the profit margin – that’s the percentage of total revenue that’s left after you account for the cost of running the business – will only be 5 per cent.

British Gas says that while its annual profits may be large in cash terms, a profit margin of 5p in the pound after tax is fairly typical over the last few years.

This is because energy companies have enormous overheads. Out of the average bill, according to the supplier, about half the money goes on buying the fuel from a wholesaler, 20 per cent or so goes on delivery and about 10 per cent goes on operating costs (paying workers’ wages and so on).

Then British Gas is obliged to spend another 15 per cent on government schemes, most of them aimed at promoting greater efficiency in homes and investment in green energy.

That does indeed leave about 5 per cent to play with, according to the company.

And Mr Bentley insists that this small profit marging does not all go into champagne for the shareholders – some of it is reinvested in various things.

He told the BBC: “That 5p is going into jobs for Britain, investments in new wind farms, investments in new gasfields.”

We’ve no reason to doubt this, although the question of how much profit is reinvested remains vague.

British Gas told us that British Gas profits are pooled with other profits generated across Centrica’s operations. Of that money, about a third is apparently reinvested in various parts of the business and a similar amount is distributed to shareholders.

That suggests that last year, Centrica would have invested about and passed on about the same amount to shareholders. Not a bad deal for shareholders, who have seen dividends go up every year for the last five years.

Not all the statements made today about where profits end up pass the FactCheck test.

Contrary to the claim quoted above, the Warm Homes Discount – a scheme to help some pensioners, benefits claimants and low earners with their bills – does not come out of the 5 per cent profit margin.

The Warm Homes Discount is a government scheme and has already been accounted for in the company’s costs – in that bit of the table above marked “government charges”.

So Mr Bentley is effectively claiming to have spent the same money twice. British Gas is not selflessly ploughing back part of its profits into a fund for its poorest customers.

There are also question marks about the size of the biggest costs the company says it incurs. The energy company claims today’s price rise comes after a “13 per cent rise in the wholesale market”.

But there’s no way for bill-payers for check the veracity of this.

Oddly, the company isn’t simply stating that it is now paying 13 per cent more for fuel than it did last year – the explanation is far more convoluted than that.

British Gas says that 13 per cent figure “is based on the average forward price for winter 2012 during the 18 months prior to October 2012 compared to the average forward price for winter 2011 during the 18 months prior to October 2011, which is consistent with Ofgem’s base hedging assumptions”.

These are all averages, estimates and assumptions about price. But British Gas must know exactly when it bought the gas and electricity and how much it paid, and is choosing not to tell us.

In fairness, it’s unlikely any big energy supplier would open its books like that, for entirely legitimate commercial reasons – but it does mean that they are essentially asking us to trust them when they tell us that wholesale prices have gone up.

Based on publicly-available information about wholesale prices, Consumer Focus says there is evidence that wholesale prices have stayed flat or have even fallen over the last year.

Examination of long-term wholesale price trends also suggests that the energy companies are quick to raise bills when wholesale costs rise but slow to cut them when costs fall.

This chimes with research done by Ofgem last year, which also found evidence of what it called “an asymmetric trajectory”, though the watchdog added cautiously: “the implication for consumer harm is not clear cut.

And of course, it isn’t all doom and gloom for Centrica when wholesale prices go up, because the giant doesn’t just buy gas and electricity at source. It produces it and sells it wholesale too.

So whether wholesale prices go up or down, profits can go up. Shareholders win either way.

The verdict

It does appear to be true that British Gas has a profit margin of 5 per cent but consumers may feel reluctant to get the violins out.

Contrary to the words of Mr Bentley, government schemes to make the energy companies help people on low incomes with their energy bills do not come from the company’s profits.

And a big question mark remains over whether there is a fair relationship between changes in wholesale fuel prices and the charges passed on to customers.

By Patrick Worrall