What makes up our energy bill? - Npower, 1 March 2013

Npower hikes energy bills 10.4% – are they trying to take the pi$$?

Less than a week after British Gas topped the energy price league, beating rivals SSE by a comfortable 12% margin to set a new high of 9.2%, Npower surges an extra 13% ahead of British Gas and a spectacular 27% ahead of SSE to set a new record of 10.4%

Why would any company want to do that? Competitors are supposed to win customers by lowering prices, not by driving them up! Unless they knew something the rest of us didn’t know: that by the time we’d struggled through the maze of tariffs we’d find ourselves stuck between a rock and a hard place.

'I bet he can't explain energy tariffs', Kipper Williams, The Guardian, 22 March 2011
The Guardian, 22 March 2011

If final proof were needed that privatization doesn’t work, this should have been it. So why didn’t we get the message? Why did we just shrug and move on?

We’ve all heard of the spin-doctors trick of burying bad news under something worse. It’s the same trick pick-pockets use, creating a distraction while they’re lifting your purse. Its become such a cliché we don’t give it a second thought. So when the corporate spin doctors played the same trick again today, hardly anyone blinked.

Only those who were on the look-out for pick-pockets would have noticed that Npower‘s record breaking price hike was buried under the much bigger news that the government has awarded the contract to build the first new nuclear plant in a generation to France’s EDF Energy and the Chinese! What bigger news can you get than that?

Coming less than a week after Peter Oborne told us on the BBC’s Question Time that Labour’s promise to freeze energy prices for 20 months was a a “return to the illiterate economic arguments of the 70s”, and David Cameron told us David Miliband was a “con man“, the government’s promise to freeze Hinkley Point energy prices for the next 35 years should have had everyone rolling around the floor laughing their socks off.

The fact it didn’t is significant. If the Emperor is to convince us he’s wearing the best suit in town when in fact he’s naked as the day he was born, first he needs to surround himself with acolytes of the Church of the Savvy (aka accredited journalists) who know how to be “realistic” and what side their bread is buttered on:

Next he needs to have any “illiterate” who might ask an awkward question kicked out of the room … Off camera, obviously:

Then, when the Emperor says things that make no sense at all and nobody around him objects, those of us watching on the TV at home think there must be something wrong with us. And the less sense the Emperor makes, and the more the toadies genuflect, the less confidence we have in our own judgement and the less we want to object ourselves.

The sad fact is that the Chinese Hinkley Point news wasn’t news at all. Three weeks ago, under the headline Lord Stern says energy and media firms ‘mislead’, the BBC’s Environment analyst, Roger Harrabin, wrote:

“… the government is about to announce a long-term price support deal for EDF’s planned Hinkley C nuclear station. The price is reported to be roughly double the current market rate for electricity, locking in the price for 35 years.”

And last Thursday, , George Osborne was stealing the headlines from the British Gas  price hike with the announcement that the government will allow the Chinese to take a stake in British nuclear power plants.

Hinkley C’s construction will be led by the French state-controlled giant, EDF…

EDF has been negotiating with three Chinese nuclear giants on the Hinkley C project – CGN, CNNC and SNPTC – all of which have been seen by the chancellor this week.

So the only thing that was news in the Chinese Hinkley Point story is that  the media had known about it for weeks but was keeping it under their hat until … Until what exactly? Until the government announced the deal had finally been signed and there was nothing anyone could do about it? Or until Npower was set to announce its own record-breaking price hike and they needed a distraction?

If we want to test which one of those hypotheses best fits the facts we need to follow the lead of Jack Nicholson’s private-eye character in that other Chinese story, Chinatown, and follow the money.

Unfortunately, Npower are even less transparent about their money than SSE or British Gas. Today’s BBC News gives numbers on price rises in just one sector:

The company said that it “aimed” to make a profit of five pence in the pound, which it regarded as a “fair return” for delivering energy reliably to people’s homes and for the risks it has to take on.

So the first thing we need to find out is exactly how Npower‘s costs compare with its competitors. A Google search for Npower fuel bill breakdown revealed this:

Breakdown of Dual Fuel Bills - Npower
Current Gas and Electricity Prices – Npower

There’s at least three things wrong with these numbers. Firstly, they don’t add up to 100%. But the discrepancy is only 10p in a hundred pounds, so we can forget about that for the moment. Second, the competition don’t have a category for metering, which makes comparisons a bit of a problem. Last, but not least, the 0.4% profit is a bit of a shocker. If Npower is to hit its 5% target it would have to increase its profits by a mind-boggling 1,150%.

Forgetting about profit for the moment and assuming the other companies include metering in operation costs, this is how Npower compares:

COST BREAKDOWN OF AVERAGE DUAL FUEL BILL (£ per £100)
Npower Br. Gas SSE Ofgem En. UK
Wholesale Energy 42.00 47.81 52.00 46.00 47.00
Network Delivery 24.10 23.82 24.00 23.00 20.00
Operating Costs 23.60 8.75 6.00 13.00
Social & Environmental 5.00 9.43 8.00 9.00
Investment 10.00
Profit 0.40 4.13 5.00 5.00
Taxes 5.00 6.06 5.00 5.00
Total 99.90 100.00 100.00 101.00 77.00

 
Even if we take metering out of the equation, Npower‘s operating costs are still three times higher and profits are ten times lower than its competitors! Which suggests the yarn they spun the BBC to explain why all the energy company yachts are rising on exactly the same tide really doesn’t hold water:

“When Tesco puts up the price of a loaf of bread by 5p no-one is surprised if Sainsbury’s do the same because they are subject to the same costs. We are clear that the market is competitive,” the company said.”

Npower blames exactly the same cost increases as SSE and British Gas, but they don’t say by exactly how much. And the BBC were so distracted by the Hinkley Point non-news story they didn’t think to ask.

Luckily The Telegraph was on the case:

Echoing Scottish & Southern Energy and British Gas, Npower blamed the increase on the cost of meeting government environment and social levies, claiming “green” charges had gone up 31 per cent. Wholesale energy costs have climbed just 3 per cent.

They don’t say anything about increased network costs but they’re set by the National Grid and should be roughly the same for all companies so, assuming the same 10% increase as SSE, this is how Npower‘s cost increases compare:

PERCENTAGE INCREASE BY SECTOR
Npower Br. Gas SSE
Wholesale Energy 3% 7% 4%
Network Delivery 10% 7% 10%
Social & Environmental 31% 38% 13%
Profit 1,150% 0% 0%

 
OK, so an increase in profit of 1,150% might sound crazy, but that’s what Npower would need to raise profits from 0.4% to the target 5.00%. With a crazy profit like that you’d expect the rest of the numbers would look even crazier, so it’s a bit of a shock to discover they add up a lot more neatly than British Gas or SSE!

NPOWER 1: COST INCREASES PER £100 BILL
£ Current % Increase £ Increase
Total Announced £100.00 10.40% £10.40
Wholesale Energy £42.00 3% £1.26
Network Delivery £24.10 10% £2.41
Social & Environmental £5.00 31% £1.55
Profit £0.40 1,150% £4.60
Total ex VAT £9.82
VAT @ 5% £0.49
Total inc VAT £10.31
Not Accounted For £0.09
Overcharged 1%

 
So it looks like Npower isn’t overcharging at all. But that can’t be right, surely? No way could they be proposing to hike profits by 1,150%.  Looking back through The Telegraph article adds another piece to the puzzle:

Profit margins will sit around 5 per cent after the increase, compared with 4.7 per cent last year and zero in 2011.

OK. So that suggests that the Npower graphic we’ve been using, which they say “reflects current energy prices”, must be a couple of years out of date. Searching their website a second time eventually reveals this blog post, What makes up your energy bill? from npower’s social media ‘guru’, Emily, posted in March 2013:

We know energy can sometimes be confusing, and one of the most common questions we’re asked is what actually makes up an energy bill. So we’ve made an infographic to show the breakdown of an average dual fuel bill.

What makes up our energy bill? - Npower, 1 March 2013
What makes up our energy bill? – Npower, 1 March 2013

Those numbers add up to a 100%. The only problem is what happened to the profit and VAT? Luckily the rest of Npower’s infographic clears that up:

Energy Bill Infographic - Npower, 1 March 2013
Energy Bill Infographic – Npower, 1 March 2013

So they’re including VAT in the same category as social and environmental costs, which is a bit odd. But nowhere near as odd as putting profit into Supplier costs.  By what stretch of the imagination can profits be called costs? Next time you fill out your tax form try claiming your salary as an expense. If they don’t have you carted off in a straight jacket they’ll lock you up for attempted theft.

So if we move VAT and Profit to where they belong and adjust the percentage profit increase to raise last year’s profit of 4.7% to the target 5%, this is how Npower’s costs now add up:

NPOWER 2: COST INCREASES PER £100 BILL
£ Current % Increase £ Increase
Total Announced £100.00 10.40% £10.40
Wholesale Energy £43.20 3% £1.30
Network Delivery £23.20 10% £2.32
Social & Environmental £11.40 31% £3.53
Profit £4.70 6% £0.30
Total ex VAT £7.45
VAT @ 5% £0.37
Total inc VAT £7.82
Not Accounted For £2.58
Overcharged 33%

 
So it looks like Npower is marking up their actual price increases by a whopping great 33%, which is almost as outrageous as SSE‘s 41%.

COST INCREASES NOT ACCOUNTED FOR PER £100 BILL
Npower 2 Npower 1 Br. Gas SSE
Total Announced £10.40 £10.40 £9.20 £8.20
Wholesale Energy £1.30 £1.26 £3.35 £2.08
Network Delivery £2.32 £2.41 £1.67 £2.40
Social & Environmental £3.53 £1.55 £3.58 £1.04
Profit £0.30 £4.60
Total ex VAT £7.45 £9.82 £8.60 £5.52
VAT @ 5% £0.37 £0.49 £0.43 £0.28
Total inc VAT £7.82 £10.31 £9.03 £5.80
Not Accounted For £2.58 £0.09 £0.17 £2.40
Overcharged 33% 1% 2% 41%

 
All of which really only proves one thing. The energy companies clearly aren’t being transparent about anything. They can fiddle around with numbers as much as they like to fit whatever case they want to make. If Npower can bury their profits as “costs” then who knows what they could bury anywhere else … like the Cayman Islands for instance! And from the pathetic performance of Energy Minister, Ed Davey, last week it would seem he’s been made him an offer he can’t refuse too!

Which brings us to one last point. You can say what you like about the Daily Mail, but their coverage of Npower‘s record price hike today reached parts much of the rest of the mainstream media failed to reach:

Earlier this year, MPs reacted with fury at [chief executive, Paul Massara’s] defence of Npower’s failure to pay corporation tax. In evidence to Commons select committee, he admitted the firm paid no corporation tax in the three years 2009, 2010 and 2011 – despite making £750million over the period.

He insisted it was legal and even desirable because it meant the firm could spend more money on ‘keeping the lights on’.

That could be one reason why Npower‘s profits were only 0.4%. If it looks like you haven’t made any profit you don’t get taxed. And Massara appears to be making the same kind of veiled threat Angela Knight made a month back: We’ve got our finger on the button. Give us your money or we’ll punch your lights out.

How does that old saying go? Fool me once, shame on them. Fool me twice, shame on me. Fool me three times and I have to ask, are they trying to take the pi$$?

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