UK Utilities Residential Margins 2006

Content

• Chapter 1 Executive Summary
  • Consumers have yet to fully suffer the rising cost of gas, as suppliers took the hit in 2005.
• Chapter 2 Press Release
  • Consumers have yet to fully suffer the rising cost of gas, as suppliers took the hit in 2005.
  • In 2005, rising wholesale energy prices destroyed retail margins.
  • 2005 was a terrible time for energy suppliers, especially those with no gas assets.
  • Centrica's 2005 supply results don't fully reflect how it was affected by high wholesale prices.
  • High wholesale prices are changing the economics of supplying energy.
• Chapter 3 Setting The Scene
  • Over 2005, energy suppliers did not recover increases in wholesale costs through their tariffs.
  • Wholesale gas prices increased dramatically with this also increasing power prices.
  • With wholesale prices increasing so rapidly, suppliers had no way of fully recovering the spot price of energy.
  • In this environment, suppliers had to hedge against wholesale price increases, so that the 2005 transfer price was not spot energy prices.
  • Centrica's decision not to fully recover wholesale costs in the supply unit was evidence that they could not fully hedge their position.
  • Even though Centrica did not fully recover wholesale costs, npower and SSE did not increase prices until 1st January 2006.
  • SSE gained significant share in 2005 by having the lowest tariffs, whereas Centrica reduced losses even with high tariffs.
• Chapter 4 Analysis By Customer Tier
  • In 2005 profitability was driven by the proportion of Tier1 electricity accounts, whilst having as few gas accounts as possible.
  • Tier2 electricity accounts became close to unprofitable during 2005, almost wiping out the margin in retailing electricity.
  • By putting off tariff increases until 2006, npower and SSE's Tier2 electricity accounts were unprofitable for the year.
  • Even though Centrica protected gas margins, losses on Tier2 gas accounts made supplying gas unprofitable overall.
  • As other suppliers continued to make significant losses, Centrica protected gas margins by not fully recovering wholesale costs.
  • For the first time, dual fuel retailing was unprofitable because losses made on the gas account were not recovered by supplying electricity.
  • The main factor influencing supplier margin is the proportion of electricity accounts on a Tier1 tariff.
  • Centrica's high proportion of gas accounts was a disadvantage against suppliers with mostly Tier1 electricity accounts.
  • In 2005 an electricity tariff did not make up for heavily discounting gas: this left Tier1-2 and Tier2-2 combinations unprofitable.
• Chapter 5 Supplier Profitability Over 2005
  • EDF Energy recorded the greatest profit, through a higher proportion of Tier1 electricity and fewer gas accounts than other suppliers.
  • Even with far fewer accounts than the market leaders, EDF Energy recorded greater profit on electricity than Powergen and Centrica.
  • For suppliers such as Powergen, a high proportion of profit comes from high consumption E7 electricity accounts.
  • During 2005 the electricity companies made a combined loss of 671m on retailing gas.
  • Dual-fuel supply was an unprofitable activity in 2005, with all suppliers making losses bar Centrica.
  • In 2005, Tier2 sales activity from non-incumbent suppliers destroyed 120m of profit in retailing electricity.
  • All electricity suppliers had 40% of sales from the opposite fuel, bar EDF Energy, that had a similar figure to Centrica at 25%.
  • Over 2005 the six major suppliers made a loss of 376m supplying energy to customers.
  • EDF Energy and Centrica were the only suppliers that did not make a loss on retailing energy during 2005.
• Chapter 6 Supplier Profitability Over 2001-2005
  • 2005 was difficult for suppliers, who will hope to recover supply losses through wholesale operations and 2006 tariff increases.
  • In 2005 the industry's retail margin plunged below the 4-5% norm of previous years.
  • High 2005 wholesale prices unravelled supply margins which, thanks to Centrica, had been steadily increasing over 2001-04.
  • EDF Energy has consistently the highest margins, by supplying less gas customers and having more Tier1 accounts.
  • 2005 was very similar to 2001, which was a year when increases in wholesale gas prices made supplying gas unprofitable for Centrica.
  • For electricity, 2005 seems to have been a significant deviation from the norm, with margins being far lower than in previous years.
• Chapter 7 Methodology
  • The figures in this report are not published margins, but are derived from a detailed model that unbundles margins from suppliers' tariffs.
  • For a clear understanding of the terms used in this report, the following definitions have been used.
  • This analysis unbundles supply tariffs into wholesale, T&D, sales and service activities, revealing margins for the 2005 calendar year.
  • 2005 retail tariffs are unbundled into 6 "costs" to allow analysis by customer tariff, PES regional and supplier.
  • Datamonitor's margins unbundling model is a detailed, bottom up model using extensive data from multiple sources.
  • Report writing team
  • How to contact experts in your industry
• List Of Figures
  • Figure 1: Gas NBP and power day ahead prices 2003-2005
  • Figure 2: Retail margins using spot prices as transfer
  • Figure 3: Structural hedges, WACOG and WACOE, and forward energy prices
  • Figure 4: Centrica and PES incumbents set supply margins through Tier1 tariffs
  • Figure 5: In area dual fuel retail tariffs over 2004 and 2005
  • Figure 6: Account movements versus price competitiveness, 2005
  • Figure 7: Unbundling of electricity supply costs by tier
  • Figure 8: Unbundling of electricity supply costs by tier and supplier
  • Figure 9: Unbundling of gas supply costs by tier
  • Figure 10: Unbundling of gas supply costs by tier and supplier
  • Figure 11: Unbundling of dual fuel costs by supplier and tier
  • Figure 12: Relationship between percentage of Tier 1 electricity accounts and overall electricity margin
  • Figure 13: Comparison of accounts by supplier and Tier
  • Figure 14: Relationship between percentage of dual fuel Tier 1-2 accounts and dual fuel margin
  • Figure 15: Electricity operating costs and profit by supplier and tier
  • Figure 16: Electricity operating costs and profit by supplier and tariff
  • Figure 17: Gas operating costs and profit by supplier and tariff
  • Figure 18: Dual fuel sales and profit by supplier and tier
  • Figure 19: Electricity operating costs, profit and total revenue by PES
  • Figure 20: Gas and electricity sales turnover by supplier, by tier
  • Figure 21: Gas and electricity operating profit, by supplier, by product, by tier, 2004-2005
  • Figure 22: Gas and elec operating profit, by supplier, by product, by tier
  • Figure 23: Gas and electricity operating profit, 2001-2005
  • Figure 24: Gas and electricity operating profit, 2001-2005, by supplier
  • Figure 25: Retail margins [%] by supplier, over 2001-2005
  • Figure 26: Gas operating profit, 2001-2005, by supplier
  • Figure 27: Electricity operating profit, 2001-2005, by supplier
  • Figure 28: Example analysis of Centrica tariffs and costs for the East Midlands region across all 6 electricity variants
• Chapter 3 Setting The Scene
  • Over 2005, energy suppliers did not recover increases in wholesale costs through their tariffs.
  • Wholesale gas prices increased dramatically with this also increasing power prices.
  • With wholesale prices increasing so rapidly, suppliers had no way of fully recovering the spot price of energy.
  • In this environment, suppliers had to hedge against wholesale price increases, so that any 2005 transfer price could not be spot energy prices.
  • Centrica's decision not to fully recover wholesale costs in the supply unit was evidence that they could not fully hedge their position.
  • Even though Centrica did not fully recover wholesale costs, npower and SSE did not increase prices until 1st January 2006.
  • SSE gained significant share in 2005 by having the lowest tariffs, whereas Centrica reduced losses even with high tariffs. APPENDIX