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Chart of the Week

2020

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Suppliers struggle for profitability

Oliver Archer
Oliver Archer

This week many suppliers have agreed a series of measures to ameliorate the effects of the Corona Virus on vulnerable consumers.

This is no doubt the right thing to do but will come at a cost. In what position are they to take this cost? This Chart of the Week takes a look at financial accounts from licensed suppliers covering 2018-19, discussing profitability in today’s energy supply market.

A first reading of the available 2018-19 accounts (some are yet to be published, others do not include profit and loss) does suggest an industry struggling to realise profits, for a range of reasons specific to supplier size and strategy. Figure 1 shows the 15 businesses which have published these reports recording an aggregate operating loss of £23mn. British Gas and Scottish Power, the two large suppliers that have already published financials for 2019, together made an operating profit of £178mn, though both recorded significant reductions year-on-year in profitability and noted the negative impact of the default tariff cap. Among the six medium suppliers whose financial metrics have been aggregated in Figure 1, only Utility Warehouse reported a profit, and as a group these suppliers made a collective operating loss of £159mn.  Prepayment specialists E and Utilita fell into losses in the 12 months ended March 2019, both citing the impact of the prepayment cap, and Octopus Energy, Bulb, and So Energy reported deepening operating losses as the suppliers invested in growth and technology development.

As well as a difference in operating profit between the large and medium groups, there is a contrast in gross profitability, or the margin made on selling energy before operating costs are considered. The aggregate medium supplier gross margin is less than half that of the large supplier group, at just 7%. Gross margins for Bulb and Octopus Energy fell to 1% in 2018-19, and only Utility Warehouse reported a gross margin in the same range as the large suppliers, at 19%. This trend is seen to an even greater extent among some of the small suppliers, with Tonik Energy posting a gross loss of £4.5mn for the year ended March 2019, and Pure Planet reporting a gross loss of £7.3mn for the same period, its second gross loss in two years. Ecotricity, Good Energy, and Green Energy UK were the only small companies to report gross margins in a similar range to Utility Warehouse and the large suppliers.

Any perception that energy supply is a comfortable sector to operate in is challenged by financial reporting from the industry, with many businesses loss making, and some even in gross losses. Tariff caps are weighing on margins, and competitive pressures continue, with suppliers having to make tough strategic decisions as a result. Our domestic Supplier Insight Service tracks key supplier developments, including financial releases, investments, and acquisitions. For more information please visit our website.

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