The claim

“The increase in earnings must be placed in the context of unusually low levels of consumption and profits in the UK in the first half of 2011.”
Sam Laidlaw, 26 July 2012

The background

The chief executive of British Gas’s parent company Centrica was speaking to shareholders rather than customers today when he said: “Centrica has performed well in the first half of 2012 despite challenging market conditions.”

If you are an executive or have a stake in British Gas Residential, there’s certainly cause for celebration today: £345m profits in the first half of this year, the equivalent of about £1.9m a day – an increase of 23 per cent on the first half of last year.

So the company is certainly performing well financially, but squeezed consumers who suffered above-inflation price rises last year will wonder whether it is behaving well.

Mr Laidlaw attempted to head off accusations of excessive profiteering by pointing to “unusually low levels of consumption and profits” in the first six months of last year.

So is British Gas just bouncing back after a freak spell of poor performance in 2011? Was today’s announcement of a 23 per cent rise in profit just a return to normality?

The analysis

Last year was the second warmest on record, according to the Met Office, and mild weather spells bad news for energy providers like British Gas.

It’s no surprise that domestic use of gas and electricity fell to exceptionally low levels in 2011, as these government figures show.

But has that historically low level of consumption been followed by a sudden increase now, reflecting the cool start to the summer?

Actually, Centrica’s own figures (here, p11) show just a small increase in the total amount of fuel we burned this year.

Total consumption of gas in the first half of 2012 was only up 3.5 per cent compared to the same period last year, while consumption of electricity actually fell very slightly, by 0.1 per cent.

So we haven’t seen a huge rebound in consumption. And British Gas’s many costs – from the wholesale cost of fuel to the social and environmental fees set by government – have gone up, some of them sharply, during the same period.

But profits have soared. Why? The short answer is that the price has gone up. British announced price rises of 18 per cent for gas and 16 per cent for electricity in August last year.

That was mitigated by a 5 per cent cut in electricity prices in January this year, but the overall picture is of above-inflation rises.

In fairness to the company, this was a pattern repeated across the energy sector, according to Consumer Focus.

The statutory body said the Big Six providers (British Gas, EDF Energy, E.ON, npower, Scottish & Southern and Scottish Power) increased gas and electricity prices respectively by 17.4 per cent and 10 per cent on average last summer, then brought them down by 3.3 per cent and 1.8 per cent this spring.

Of course, British Gas isn’t a charity, and maybe £345m in six months isn’t an unreasonable level of profit.

Perhaps Mr Laidlaw is right and the latest figures only look excessive compared to the first half of last year, with Centrica are keen to portray as unusually poor.

However, this argument all depends on how far back you want to look. Profits in 2011 certainly were low compared with 2010, but only because that year was one of the best in the company’s history.

The statutory body Consumer Focus has handily summarised British Gas Residential’s results from 2007 in this table:

If we look across all six years, operating profits in the first half of 2011 (£281m) are only slightly below the average half-year figure (£286.5m).

To put it another way, this year’s results are more unusual than last year: they’re significantly above average. In fact, the first half of 2012 is the third most profitable half-year period since 2007.

The verdict

E.ON has already committed to no price rises in 2012. Given today’s negative headlines, will British Gas follow suit?

Whatever happens, we think the suggestion that today’s figures are just a return to the norm after a particularly lean spell last year is dubious.

These are bumper half-year results for British Gas, and that can only be because of price hikes dished out to customers last year.

By Patrick Worrall