On average, generating electricity has proven to be the most lucrative
activity, but profits have dwindled in recent years to see a more balanced
profit ratio between residential supply and power generation.

The Big Six suppliers make their profit from three core areas:

Supplying energy to residents
Supplying energy to business and industry
Generating energy

However, this picture is too generalised, as each company performs very
differently in each activity, with some (like EDF) deriving the majority of
their earnings from generating power whilst others (like Centrica) rely
more on their energy supply units.

The total value to the market of selling electricity and gas to UK
households in 2016 was £28 billion, which can be compared to the value of
selling energy to industrial sectors of £8.5 billion and the value of
supplying energy to the commercial, transport, agricultural, public and
other sectors of £13.4 billion.

However, the profitability of supplying energy varies depending on the
sector being supplied.

The value of selling electricity and gas to the domestic UK market fell
annually over the three years to 2016 on a per kilowatt hour basis, while
the rates covering the industrial, commercial and other sectors remained
fairly stable.

Average net selling value per kWh in 2016 Pence per kWh

Supplying domestic electricity 14.028p
Supplying industrial electricity 8.07p
Supplying commercial and other electricity 11.635p
Supplying domestic gas 4.162p
Supplying industrial gas 1.641p
Supplying commercial and other gas 2.446p

Earnings from generating energy

One of the primary reasons that each of the larger suppliers puts in such a
varied performance when it comes to generating energy is because of the
different fuels each of them use.

Coal, nuclear, gas and renewables are all priced differently and carry
different levels of profitability, which over time can shift around, as
government policy and public attitudes change.

Coal Gas Nuclear Renewable Other

British Gas 11% 35% 10% 40% 4%
SSE 9% 56% 5% 27% 3%
EDF Energy 6% 8% 77% 9% 0%
EON 14% 41% 11% 29% 5%
Scottish Power 7% 57% 6% 28% 2%
N-power 1% 90% 1% 7% 1%
UK Average 9% 44% 21% 24% 2%

EDF Energy generates market-leading profits from generating power to the UK
mainly because of its nuclear capabilities, demonstrated by the likes of
Torness atom plant in East Lothian.

However, profits have fallen over the years and Pearth-based SSE, the only
other to deliver consistent profit from its operations, has caught up.

While the cost of energy for UK households often draws criticism of energy
companies, the majority of domestic bills are made up of costs that
suppliers have limited control over.

On average, the Big Six made just £53 worth of earnings from a domestic
bill of £1,123 in 2016 – just 4.7% of the total.

There is another substantial player within this market. Drax Group operates
the largest renewable power plant in the country, after converting three of
its six units to burn wood pellet biomass rather than coal.

The plant feeds about 7% of the nation’s total electricity demand and
represents about 17% of all renewable energy generation. It also supplies
businesses in the UK through Haven Power and Opus Energy, but does not feed
energy to residential customers.

Earnings from supplying energy

All of the Big Six have been shedding customer accounts over the past few
years, as they cede market share.

Taking the two London-listed firms, Centrica experienced a sharp 13%
decline in domestic energy account numbers over the four years to the end
of 2017, losing 1.9 million customers, while SSE saw a 14% drop between
March 2014 and March 2017 after losing 1.1 million customers.

The profitability of Centrica’s domestic supply arm in the UK is market
leading, while EON’s profits have been steadily growing.

Meanwhile, SSE has also delivered earnings that match the consistency and
reliability of its generation arm, making it the best overall performer.


Overall, there are fundamental changes occurring in the UK energy market.
The price cap represents the biggest government intervention since
privatisation, and regulatory pressure is likely to remain high for the
foreseeable future.

Meanwhile, the industry is dealing with other changing trends, such as the
move toward renewable energy which is placing more importance on
distribution networks as smaller scale power plants become more common and
continue to bypass the transmission network. This is also opening up growth
areas like energy storage.

JOSHUA WARNER is a utilities market analyst at IG Markets in London.

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