Monday, 7 September 2009

Late payers put squeeze on E.ON’s profitability

One of Britain’s biggest energy suppliers is facing a mountain of bad debt as its industrial customers put off paying their electricity and gas bills to solve cashflow problems.
E.ON said that its bad debts in the UK were running at the level of “hundreds of millions of pounds”, a burden that the utility argues must be taken into account by Ofgem in its investigation into current retail energy pricing.
“We have not made a profit [in the UK retail market] since 2006. We will not make a profit this year,” an E.ON spokesman said. “We have a problem with industry paying their bills.”
In August RWE, the Germany utility that owns npower, warned that its UK retail business was affected by payment problems. “Social obligation costs, as well as bad debt, reduced our earnings significantly,” the company said, indicating that npower’s results would be lower this year and affected by public policy. “[UK] governmental programmes in 2009 are expected to cost up to €100 million [£87 million] more than last year,” RWE said.
The energy companies were already heading for a conflict with the Government and Ofgem, the energy regulator, over energy prices. In response to public outcry over the failure by utilities to pass on quickly the benefit of falling wholesale gas prices, Ofgem has written to the chief executives of the six leading energy suppliers asking them to explain.
The day-ahead gas price, a benchmark for short-term demand, has fallen below 20 pence a therm, two thirds below the level of a year ago, and it is expected to fall farther because of weak demand from industry and an anticipated glut of liquefied natural gas (LNG) imported from the Middle East and North Africa.
Even at these low price levels, gas companies are expected to dump cargoes of LNG in Britain. New supplies of LNG from Qatar, Egypt and Nigeria have coincided with a gas glut in the US, where demand for imported fuel has evaporated. The US gas price has fallen below UK levels and is at a seven-year low, forcing LNG suppliers to divert cargoes of LNG destined for the US to terminals in west Wales and the Thames Estuary.
The wholesale price collapse is rewarding some utilities with record profit margins. They are reluctant to pass on any benefit to consumers, arguing that they are making up for past losses and building up reserves to cope with bad debts and the burden of governmentimposed costs relating to climate change.
“We have had two years in which we have invested more in the UK than we have taken out in profit. Over the long term that is unsustainable,” E.ON said. “We will be spending £1 billion per year for the foreseeable future.”
In their response to Ofgem’s pricing inquiry, the utilities will argue that the current wholesale price of fuel is not the cost of the fuel supplied to consumers at present as utilities have a portfolio of contracts to purchase gas as much as a year in advance or long-term supply agreements at prices indexed to crude oil.
“It’s quite obvious the energy we are using is the energy we bought last year,” a spokesman for a leading utility said.
However, Ofgem is under pressure to show that it is acting tough over energy prices. The regulator faces losing some of its influence under government plans to give the Department of Energy and Climate Change more control over energy infrastructure and policy.
Source: The Times

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