How are energy companies in the UK going bust but also having colossal profits?

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Last 2021 and early 2022, a large number of energy companies in the UK went bust.

Now all that is on the news is how the UK Government are going to impose a windfall tax on energy companies because their profits are soaring.

How do these two things happen at the same time?

In: 23

Price of oil and gas vary a lot, but the cost of doing business and the amount purchased locally stay relatively consistent.

So when the global demand for oil and gas is low because there are no major wars but there is a pandemic where everyone suddenly drives their car less oil and gas prices are low and you operate at a loss.

When everyone starts driving to work again and there is a war causing a shortage just as demand picks up oil and gas prices are at record highs but the costs of getting it out of the ground and delivered locally are exactly the same as before so your local energy company is now operating at record profits.

Energy producers and energy suppliers are two different things.

Energy producers are those who have the solar/wind farms, the power plants, the oil and gas extraction infrastructure, etc.

Energy suppliers are those who buy electricity /gas / etc from the producers and sell it on to retail customers like you and me.

The producers are making bank.
The suppliers are in the middle trying to turn a profit with rapidly changing supply prices, but long-term contract commitments which forces them to supply fuel at pre-negotiated rates way below the cost that they are having to buy the energy for. I, for example, am currently in the middle of a 2 year fixed rate deal which means my supplier has to still charge me the cost of gas as we agreed in summer 2021, even though the actual electricity and gas prices they are now paying are much higher.

The market in the UK is pretty screwed up anyway; privatisation led to some really gnarly relationships between suppliers, producers, and the power operators / infrastructure managers. We also had some deregulation of supplier provision which led to an influx of small suppliers who were trading on the edge of affordability. When they got whacked with massive price hikes they didn’t have enough in the bank to smooth over the cracks.

For the most part these are different types of companies, on different sides of the same problem.

The companies that were going out of business last year were largely resellers; companies not actually producing or importing energy, merely buying it wholesale and selling it onto consumers at a small mark-up.

When wholesale energy prices spiked they found themselves in trouble; they were already working on small profit margins, many had customers locked into long-term contracts (so they couldn’t increase their own prices), and they no financial reserves or other areas of business to pull funds from to cover the gap between the increase in wholesale prices and when they could increase the prices they charged customers. Their costs went up, their revenues didn’t, so they went out of business.

A large part of why wholesale energy prices spiked was that there was a big surge in demand for energy as the pandemic started easing up (plus the Russian invasion of Ukraine hasn’t helped). That meant the oil and gas companies producing energy were able to increase their prices (higher demand, same supply, higher prices). So those companies ended up making a lot more money from the higher energy prices they were able to charge, but without their costs increasing at the same rate.

So the big energy companies are pulling in huge profits because they put up their prices a lot. Consumers are paying for this in higher bills and higher costs of goods. But a bunch of the resellers in the middle went out of business because there was a small window when they were forced to buy at the higher prices from the big companies but they couldn’t pass the extra costs onto the consumers.

There are energy suppliers and energy producers.

The producers actually produce the energy – they drill the gas (or import it via pipes), or run the power stations to produce the electricity.

The suppliers are just a shop that deals with small transactions, instead of bulk deals that the producers are in. They buy in bulk from the producers and sell in bite sized packages to regular users.

The problem is that producing energy has become very expensive – gas is in short supply internationally, which means that importing it has become very expensive. It also means that power stations which run on gas have to buy expensive fuel. There are also shortages of electricity in Europe, so the UK is exporting a ton of electricity, when they would normally import it.

The result is that producers are putting up their prices. Some energy suppliers made long term deals with producers locking in fixed prices for 2 or 3 years in advance. Some energy suppliers would buy whatever was cheapest a month at a time, so just have to pay whatever the producers are asking.

The problem is that there is a special law which limits the price suppliers can charge. This means that even though producers are putting up their prices, suppliers are not allowed to put their prices up.

While suppliers which had locked in prices years in advance were OK, other suppliers were paying the producers more than they were legally allowed to charge.

Politics mostly. For good reason, companies are allowed to carry forward their losses from bad years to offset gains in good years and pay significantly less in tax in good years doing so. Politicians love to point to the less contextualized comparison of profit to tax RIGHT NOW as a way to deflect blame away from themselves and their policies during periods of high energy prices.