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ECIU Disinformation About Grid Companies Profits

September 5, 2017
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By Paul Homewood

 

 

The Energy & Climate Intelligence Unit (ECIU) was set up a few years ago with support from rich liberal foundations in the US and elsewhere, with the purpose of disseminating climate change propaganda.

It has been headed from the outset by ex BBC man, Richard Black, so it is not surprising that most of the information coming out of the ECIU is biased and often fake.

True to form, it has just published another grossly dishonest piece of spin:

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The six companies that run the cables bringing electricity to homes and businesses across the country made annual average profit margins of 32% over the last six years, a new analysis concludes.

Electricity Meter By James Burrell

A Government review of energy costs is currently underway. Image: James Burrell, creative commons licence

 

 

This equates to about £10bn on the nation’s collective energy bill over six years (2010-15), or around £27 per home per year.

The analysis from the Energy and Climate Intelligence Unit (ECIU) found that these Distribution Network Operators (DNOs) paid dividends to their shareholders during this time amounting to 15% of turnover – roughly half of the final profit. This equates to almost £1bn (£850m) per year, or roughly £13 on the average domestic bill.

http://eciu.net/press-releases/2017/electricity-network-firms-profits-add-10bn-to-bills

 

WOW! How dare they make a profit of 32% on turnover!

It is clear to see what they are up to. Gradually people are becoming aware of just how much the Climate Change Act is costing them. The ECIU of course remains in denial about this. Faced with the fact that they cannot dispute the facts, they choose to put up a smokescreen to convince the public that it is all the fault of the wicked energy companies.

The only trouble is that when you dig deeper, the real truth is not what they would like you to believe.

Let’s start with that £10bn figure. As they say, it is over six years, an average of £1.6bn a year. This figure pales into insignificance with the cost of the Climate Change Act, estimated to be £9.4bn this year alone.

Most people would, of course, assume that the ECIU are referring to the Big Energy companies themselves, who are often accused of profiteering.

But that would be wrong. As OFGEM show, the element of profit (EBIT) in energy bills is tiny, just 4.8% last year, and that is before tax and interest.

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https://www.ofgem.gov.uk/data-portal/retail-market-indicators#thumbchart-c7770745751913637-n84514

 

What the ECIU are talking about are the Distribution Network Operators (DNOs), who run the distribution network. Imagine that if the National Grid ran the motorways, the DNOs would run the A and B roads.

As such, the DNOs do not buy and sell goods on which to make a margin. Instead they are highly capitalised businesses, which effectively charge for using their assets.

There is a similarity here with service industries. Let’s take a simplistic example:

Tesco buy £800 of goods, and sell for £1000 – they make a margin of 20%.

Mr Bloggs, the plumber, charges £1000 for a job, and the cost of parts fitted was £100 – he has made a margin of 90%.

But has the plumber profiteered? Of course not, as most of his cost is his own labour.

Comparisons of profit as a percentage of turnover are irrelevant and misleading in these sort of cases.

Coming back to the DNOs, we need to recognise that most of their cost is capital, ie interest and depreciation. If we take the example of Electricity North West, top of the ECIU list, we find that their profit last year was £71 million, after tax.

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http://www.enwl.co.uk/sitemap/about-us/investor-relations/financial-reports

 

But their equity was £764 million, so the return on capital was only 9.3%.

image

 

In total, the assets are valued at £3.3bn, so the return on assets would be much smaller still.

Much of the profit made needs to be reinvested of course, not least to upgrade the networks to cope with renewable energy.

According to the ECIU, the dividend last year was £30 million, giving a return on capital of 3.9%, a not unreasonable figure.

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http://eciu.net/press-releases/2017/electricity-network-firms-profits-add-10bn-to-bills

I would be the last to defend the DNOs or the National Grid, but they are regulated by OFGEM because of the monopolistic position they are in. If OFGEM were able to squeeze their pips any more, it would make little difference to our bills.

It also needs to be remembered that it was the government which originally sold off the grid, so taxpayers have benefitted.

There may be a case for renationalising the lot, but the government would then need to find tens of billions to buy them back, and then find the cash to plough billions more into upgrading networks. I suspect even Jeremy Corbyn’s magic money tree might struggle with that.

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12 Comments
  1. Ian Magness permalink
    September 5, 2017 6:37 pm

    Your analysis, as ever, is spot on Paul. The key points are that not only are these companies highly regulated with regard to profit but, if your just keep kicking them, they will pull out altogether. They need profits both to reinvest and to return some cash to shareholders. They are businesses, not charities. Without the possibility of shareholder returns they and their long-term investment plans would cease to exist and the government would have to run the whole show again. Surely nobody in their right mind would want that!

    • John Palmer permalink
      September 5, 2017 7:28 pm

      ” Surely nobody in their right mind would want that!”
      Very succinctly put.
      The socialist, green blob either have no grasp of how proper markets work (given the chance) – or more likely, they do and want to stop it happening.

      • Gerry, England permalink
        September 6, 2017 1:07 pm

        The trouble is once a socialist understands economics they are no longer a socialist since they will clearly see why their plan of spending other people’s money will always fail. Ask a Venezuelan.

    • HotScot permalink
      September 5, 2017 7:32 pm

      Ah! But they are evil capitalists, regulated by eviller socialists who don’t want a free market; they want to get their wriggling little fingers into every pie and thereby screw up the entire energy market.

      And when I say socialists, I include our current government.

      • Gerry, England permalink
        September 6, 2017 1:06 pm

        Seconded, Mr HotScot. Blue Labour to the core.

  2. Athelstan permalink
    September 5, 2017 8:13 pm

    A cogent analysis Paul, as per usual.

    Ey up, the energy utilities get it in the neck several ways from HMG – yep Ofgem, this bullshit and the executive and individual MPs virtue signalling – tell the UK public what naughty barstewards they all are “profiteering and get yourself switched” as if switching is a fekking cure all for what is a fixed, closed, constant idiot, green bound interference in a market which is so screwed up it is difficult to know what is the truth.

    Finally – you can’t tell me that some bod in the BEIS.gov dept hasn’t had some input into this ECIU drivel, as you say Paul it is a ‘veil’ for lots of HMG dirty linen hanging loose.

    O/T but on a meme: http://usstory.net/business/how-macquarie-bank-left-thames-water-with-a-2bn-debt/

    Foreign investment companies seem to love UK utilities, do they not? I don’t have to wonder why, a mainly law abiding, painfully obedient [what choice is there other than doing your own thing – not possible for some it must be recorded] and captive market could have something to do with it.

    Do you ever feel like the ‘fatted calf’?

    • HotScot permalink
      September 5, 2017 8:32 pm

      Who, Mooe?

      • Athelstan permalink
        September 5, 2017 9:06 pm

        UK energy policy does that, it’s all bull we’ll all be made exhibits and a long lost civilization buried by the sands of time.

  3. tom0mason permalink
    September 6, 2017 4:52 am

    ECIU Disinformation improves profits for Roger Black.

  4. CheshireRed permalink
    September 6, 2017 5:14 am

    The Green Blob spreading climate change related disinformation? Again? Imagine my surprise.

  5. It doesn't add up... permalink
    September 6, 2017 10:21 am

    Imagine how much DNO charges would have to increase if we go all out for EVs. A first guess would be double, so that would add of the order of £30bn a year to bills. Plus double again for the main grid of course.

  6. Tim Hammond permalink
    September 6, 2017 10:52 am

    Not sure your definitions are quite right. Using profit divided by balance sheet equity gives return on equity, not return on capital. For that you need to decide whether youa re looking at capital employed or capital invested..

    The Return on Capital Employed for the statements shows is thus 259/3147= 8.2% For ROCE, you use EBIT rather than net income.

    The Return on Invested Capital which uses net income divided by fixed assets, intangible assets and current assets, less current liabilities and cash. IN this case, that’s 71/2,950 = 2.4%

    All in all, nothing special at all in terms of returns.

    As you say, the key point in these sorts of businesses is the amount invested, as it is the repayment of, and return on large amounts of capital that makes up the cost,

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