Why has British Gas made a record profit?
British Gas had Ofgem to thank for its record-breaking profit on Thursday, as it was allowed to recoup some of the money it lost during the energy crisis and the pandemic.
The energy regulator decided last year that it would allow companies to charge their customers a little extra in order to recoup money they lost.
For British Gas – the UK’s biggest energy supplier – that added an extra £500 million to its first-half results.
Energy suppliers like British Gas have struggled to make any real profits for years – the price cap on energy bills put a stop to that.
Wholesale energy prices started to rocket in 2021 and 2022. As a result, fixed-price energy deals – where a household signs a contract which guarantees it the same price for a year or two – started rocketing in price.
It meant that these contracts, traditionally cheaper than your supplier’s default tariff, were no longer a good deal for customers.
As a result, millions of customers who had previously signed a one-year deal with British Gas and other such suppliers, just let those deals run out and rolled onto the default tariff, which is capped by Ofgem.
The challenge for Centrica and some others therefore became that they had more customers than expected on the default tariff, and had to buy gas and electricity to supply these customers.
The price that these customers paid British Gas for their electricity was capped by Ofgem, but the price that British Gas paid to its suppliers was not.
This meant that the company, and many other suppliers, was paying more for the energy it bought than what it sold, leading to massive additional costs.
The companies took these hits, but Ofgem – fearing that weak suppliers might struggle or even collapse – allowed them to later recoup these costs by adding around £100 on the price cap.
Because of the Energy Price Guarantee, which ensured that the average household bill would be £2,500 per year, this extra money would have been paid to suppliers from the Government.
Without this Government support households would have paid that money instead.
For British Gas this added up to around £500 million in total in the first six months of the year.
Ofgem also decided that it would allow companies to reclaim some of the money that they lost during the Covid-19 pandemic.
During the pandemic companies dealt with higher levels of customer debt as households struggled with their bills.