dl analysis of electricity profits 201116

Review of Electricity Company Profitability

The Generation Game

Revised Edition to 31st Dec 2015

Derek W Louden

Abbian House

Tower Street

Tain

Ross-shire

IV19 1DY

Tel: 01862 892734

Mob: 07876 774412

Email: [email protected]

This year we saw the evidence given by the Supply Directors of some of the major energy

companies, usually referred to as the “Big Six” accepted by the Competition and Markets Authority.

The investigation refused to look at the wholesale market. The “Big Six” presented a uniform story of

low returns which no-one could consider were exhibiting evidence of monopoly or oligopoly profit. I

lobbied hard to have the CMA look at the wholesale market but was literally laughed at for my pains.

There is no trace of the evidence I provided being referred to in the CMA’s report.

What did we find this year?

Scottish & Southern Energy shows that their Supply business – their retail arm selling electricity to

customers was earning low returns. This position is illustrated in the graph below:

I was struck by the phrase “in our retail business” which was repeatedly used in SSE’s presentation

to the House of Commons Energy & Climate Change Select Committee. What does the rest of their

business tell us? Each of the “Big Six” is split into a Supply business and a Generation business. The

returns earned by the Generation business which produces the electricity is shown below:

Although returns have fallen in recent years SSE still earns 27.91% on Generation Sales in 2015. Of

every £1 in sales, nearly 30p is profit. No mention was made of this in the CMA Report. The CMA

only looked at the Supply/Retail side of these businesses. This ensured they found nothing wrong.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

DA

%ag

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SSE EBITDA % return on Supply Sales 2009 -2015

https://www.ofgem.gov.uk/system/files/docs/2016/07/energy_companies_consolidated_segmental_statements_css_july2016.pdf

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

DA

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SSE EBITDA % return on Generation Sales 2009 -2015


Rather than the 5% return claimed SSE earn a return of over 11% on their business when Generation

and Supply are looked at in the round. Why was the CMA so determined to dismiss concerns about

the Generation business and only to look at Supply? So much for SSE, what about the others?

Centrica’s good return of 7% on their supply business in 2012 which made them the most profitable

of the “Big Six” from this side of their operations has since evaporated. The supply side of their

business is facing real competition and the return earned has fallen almost to zero.

Centrica’s Generation arm performance is illustrated in the diagram below.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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SSE EBITDA % return on Total Sales 2009 -2015


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Centrica EBITDA % return on Supply Sales 2009 -2015


This shows that Centrica earned a 24.57% EBITDA rate of return on generation sales in the most

recent year for which figures are available. This was well down on the 35.01% return in year 2012

but is an increase on the 2014 figure of 19.11%.

The collapse in the Supply side of the business means Centrica has suffered a decline over the year

with the return on Total Sales earned in 2015 at 4.68% being well down from 9.8% in 2012.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Centrica EBITDA % return on Generation Sales 2009 -2015


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Centrica EBITDA % return on Total Sales 2009 -2015


E.On’s return on Supply Sales to retail customers was 2.84% in 2015. This is down from 3.75% the

year before. As with the other firms, there is a clear sign that competition has impacted EBITDA.

E.On’s return on Generation Sales doubled in the last year up from 8.77% in 2014 to 18.56% in 2015.

The CMA gave a clear signal that they had no interest in Generation and that profits earned here

would be ignored. E.On is another firm who has managed to boost their earnings in the unregulated

“anything goes” segment of the market.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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E.On EBITDA % return on Supply Sales 2009 -2015


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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E.On EBITDA % return on Generation Sales 2009 -2015


E.On’s overall performance was also up from a return of 4.73% in 2014 on their business taken as a

whole to 5.85% in 2015.

EDF’s Supply business was the worst performing of the “Big Six” but has made some improvement

and a small profit in the last two years. Before you start to weep for them, we’ll move along to the

next diagram....

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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E.On EBITDA % return on Total Sales 2009 -2015


-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2009 2010 2011 2012 2013 2014 2015

EBIT

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EDF EBITDA % return on Supply Sales 2009 -2015


EDF earned a whopping 35.92% return from their Generation arm in 2015, up from a return of

33.46% in 2014. They’ve kept the profit in the part of the business which isn’t exposed to much

public scrutiny. Smart move! EDF has the highest EBITDA return in the industry for Generation.

EDF’s EBITDA return on Total Sales is 17.13%, the highest of the industry’s “Big Six”. This isn’t a

return you’d expect to see in a competitive industry. We’re again led to the conclusion that the CMA

ignored the part of the industry where excess returns were being made and concentrated on the

part of the industry which didn’t have a problem. Pensioners and everyone in fuel poverty will pay

the price.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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EDF EBITDA % return on Generation Sales 2009 -2015


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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EDF EBITDA % return on Total Sales 2009 -2015


RWE npower’s Supply business has not been able to continue to earn a profit, posting a loss of

0.94% in 2015 in contrast to a profit of 2.32% in 2014.

RWE has suffered a huge drop in its profit percentage from Generation sales. It fell from 43.35% in

2012 to 6.37% in 2014, in 2015 the EBITDA return recovered slightly to 9.86%.

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

2009 2010 2011 2012 2013 2014 2015 EBIT

DA

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RWE npower EBITDA % return on Supply Sales 2009 -2015


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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RWE npower EBITDA % return on Generation Sales 2009 -2015


RWE’s profits in their UK business rose steadily reaching 8.15% EBITDA on Total Sales in 2012. This

performance wasn’t maintained in 2013, 2014 or 2015 when the return fell to 2.52% due to a

collapse in generation profits and competition in the Supply business.

Scottish Power made a 4.74% return on Supply sales in 2015, down from 6.98% in 2014. Scottish

Power’s EBITDA return on Supply sales is the highest rate earned by any of the “Big Six”.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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RWE npower EBITDA % return on Total Sales 2009 -2015


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Sc Power EBITDA % return on Supply Sales 2009 -2015


Scottish Power saw a big decline in Generation profit percentage in 2012 and again in 2013, this will

be partly due to the closure of Cockenzie. In 2014 the returns improved and the run-down at

Longannet was postponed, it finally closed in 2016. A last hurrah in 2015 saw Generation profits hit

their highest level in seven years.

Scottish Power has halted the decline in the EBITDA return on Total Sales. From a low point at 6.11%

in 2012, the return on total sales increased to 12.12% in 2015. The highest return earned by Scottish

Power in seven years and the second highest overall return in the industry.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Sc Power EBITDA % return on Generation Sales 2009 -2015


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2009 2010 2011 2012 2013 2014 2015

EBIT

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Sc Power EBITDA % return on Total Sales 2009 -2015


The Supply Business dealing with retail sales to customers doesn’t look abnormal. The market seems

to be competitive with other firms offering increased competition in recent years. Why did the CMA

concentrate on this? Baffling.

When we look at the Generation Sales the position is markedly different with EDF earning a 36%

return and with three other firms with EBITDA of over 20%. These show clear evidence of abnormal

returns above what would be expected in a competitive market.

Interestingly, in contrast to Supply where most firms saw falling returns as the CMA study was

ongoing, the rapid clearance of the Generation sector by the CMA led to every one of the “Big Six”

increasing their wholesale EBITDA in 2015.

We should also consider whether input costs for raw materials are being set by any of the players

through intra-company trading (central group buying) where the cost might be manipulated to

deliver a tax charge in the Parent Company’s country of origin rather than where the profit is really

earned.

3.9

2%

1.5

7%

5.8

4%

-0.1

6%

-1.8

6%

2.6

5%

2.3

7%

4.5

2%

8.1

7%

1.4

5%

0.2

3%

4.9

6%

0.1

8%

4.1

0%

7.2

1%

0.0

7%

1.9

5%

3.6

0%

3.0

1%

3.0

9%

7.0

0%

-0.7

4%

3.9

2%

4.3

4%

4.4

7%

3.6

8%

2.0

2%

-0.1

2%

3.8

6%

2.9

1%

6.9

8%

3.7

5%

2.6

2%

1.9

1%

2.3

2%

4.3

7%

4.7

4%

2.8

4%

0.0

5%

1.1

8%

-0.9

4%

3.6

9%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

ScPower E.On Centrica EDF RWE SSE

EBIT

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EBITDA % return on Supply Sales 2009-2015

2009

2010

2011

2012

2013

2014

2015


23

.23

%

29

.89

%

25

.65

%

21

.30

%

31

.99

%

63

.47

%

23

.23

%

16

.70

%

28

.27

%

32

.79

% 47

.17

% 61

.29

%

22

.63

%

27

.84

%

29

.51

%

39

.70

%

47

.42

%

54

.45

%

19

.38

%

22

.69

%

35

.01

%

40

.63

%

43

.35

%

50

.38

%

16

.44

%

12

.84

%

22

.98

%

36

.02

%

11

.26

%

52

.83

%

21

.02

%

8.7

7%

19

.11

% 33

.46

%

6.3

7%

23

.31

%

23

.82

%

18

.56

%

24

.57

%

35

.92

%

9.8

6%

27

.91

%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%


EBIT

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EBITDA % return on Generation Sales 2009-2015

2009 2010 2011 2012 2013 2014 2015


The “Big Six” all shared with the Energy and Climate Change Select Committee that they earned 5%

on their Supply business. The Generation business where the money is being made was overlooked

by the Committee. It was also overlooked by the CMA review.

Returns of over 30% on Generation make a mockery of the evidence given to the committee.

We can see above that two of the firms (RWE and Centrica) are making the “no more than 5%”

mantra they stuck to at the Energy & Climate Change Committee and also in subsequent

submissions to the CMA Inquiry team. E.On don’t make much more than this.

SSE (11.47%), Scottish Power (12.12%) and EDF (17.13%) made considerably more from their

business in the UK when the Generation profits were factored in.

The CMA inquiry team headed by a former director of N-Power heading a committee of city

grandees produced findings suggesting things were mostly the fault of customers who refused to

switch supplier. Basically they concluded its our own fault we’re being ripped-off.

Whilst that’s true in part, the Generation Game has a fair bit to do with it as well. Pensioners, those

with disabilities, people dependent on benefits and those in work but on low incomes will rightly

curse the CMA for clearing this exploitative oligopoly of all blame and for encouraging them to carry

on regardless.

It was a new experience for me to be laughed at openly by CMA officials. In truth, this is no laughing

matter.

DWL

(Cover photo: First Hydro, Dinorwig, Wales, http://www.fhc.co.uk/dinorwig.htm )

9.4

7%

7.0

1%

7.5

1%

4.1

6%

1.9

0%

8.7

6%

9.0

9%

6.8

4%

10

.02

% 12

.86

%

5.2

3%

10

.73

%

8.1

2%

8.9

6%

9.9

0%

15

.93

%

6.3

7%

10

.90

%

6.1

1%

6.7

2%

9.8

0%

16

.03

%

8.1

5%

10

.57

%

7.6

3%

4.9

2%

6.2

4%

14

.68

%

5.6

6%

9.8

7%

12

.07

%

4.7

3%

5.9

3%

15

.99

%

3.3

6%

10

.42

%

12

.12

%

5.8

5%

4.6

8%

17

.13

%

2.5

2%

11

.47

%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%


EBIT

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EBITDA % return on Total Sales 2009-2015

2009

2010

2011

2012

2013

2014

2015


http://www.fhc.co.uk/dinorwig.htm

dl analysis of electricity profits 201116

Economy & Finance