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Finance & Investment Analysis Follow the money Politicians and the media accuse energy companies of ripping off their customers, but if this is true, where has all the money gone? Mathew Beech looks at the interim results of the big six. M ost of the big six energy suppliers posted their interim results and management statements last week, and they paint a different picture to the one presented by the media and politicians. The shadow energy secretary, Caroline Flint, has been particularly harsh. She has accused the major energy companies (British Gas, Eon, EDF, Npower, SSE and Scottish Power) of "mis-selling, or predatory pricing, or unjustifiable mark-ups between wholesale costs and retail prices". Even energy secretary Ed Davey has conceded that there is a "problem" in the energy market, although there is no political consensus regarding a solution. The figures and declarations from the suppliers themselves, though, tell a different story. SSE's half-yearly results record that it has made a substantial loss of £115.4 million on its retail business, down from a profit of £48.3 million in the same period last year. The loss reduced SSE's overall profit for the six months to £354 million. The other suppliers, which posted halfyearly or nine-month results, all showed supply businesses making profits of between 3 and 7 per cent. "I think the supply operating margin is limited," says Angela Knight, chief executive of Energy UK. "They are going from about 4 per cent to a negative margin to SSE. "I think the fact that there is a focus in this area is actually quite important to show the overall numbers can look quite large but £865 million EDF six-month Ebitda in the UK on revenues of £4,188 million £354 million SSE six-month group operating profit. Supply loss: £115.4 million £569 million British Gas six-month adjusted operating profit on revenues of £7,912 million £236 million Eon UK nine-month Ebitda on supply revenues of £5,876 million when they pay for everything, the investments you've got to pay for, it comes down to quite small numbers." She adds: "The fact that there is a margin of 4 per cent down into a negative margin shows the industry is not overcharging. "We've got an industry doing the job it is there to do and being fair about it." One of the key areas that energy companies have raised is the costs of government obligations, the "green levies" that are under review by the government. One analyst who works closely with the suppliers told Utility Week: "The suppliers are in a world of rising prices and have to pass on at least some of those." The chief executives echo this sentiment. Eon's Tony Cocker said "the costs we don't control, such as networks and government schemes, have risen", while Paul Massara of Npower said "we continue to see significant external pressures on the cost of supplying energy in Britain". This is something that Stephen Hunt, an analyst at UBS, agrees with. "We believe margins are the wrong target if the aim is a sustained meaningful reduction in the cost burden," he says. "Indeed, even if retail margins were cut to zero, this would be more than offset by even a single year of forecast rises in government policy and network costs." In a report on energy prices, Hunt said the inquiry the government has launched into the energy market was "welcomed" by the major suppliers. Cocker said as much to the Energy and Climate Change Select Committee. Hunt added that a full Competition Commission inquiry would allow the big suppliers the chance of "clearing their names once and for all". Energy prices rose by more than 150 per cent between 2004 and 2013, but "a large proportion" of this can be attributed to wholesale energy costs and a "catch-up on over 15 years of underinvestment", according to Hunt. The increase in prices is not down to the energy companies giving their consumers "rip-off energy bills" as Flint has said. The increase in bills is down to an increase in the costs to the companies, such as the costs of transmission and distribution, as well as policies such as the Energy Company Obligation (Eco). However, there is a disconnect between what the energy companies are saying is behind the price increases and what politicians are saying. The solution to the broken relationship between customers, politicians and energy companies is simple, according to Knight – information. She says: "The things we need to do are keep on making the same points on what is actually happening, on what is being made in terms of profit, and what we've got to do is keep on putting more and more information out there. "We've got to be as transparent as we possibly can." £220 million Npower nine-month supply operating profit on revenues of £5,400 million £157 million Scottish Power nine-month Ebitda on supply and generation revenues of £5,235 million UTILITY WEEK | 22nd - 28th November 2013 | 19