Energy firm may see figure rise by two-thirds after ‘benign’ trading conditions

Scottish & Southern Energy will come under fresh pressure to rethink its policy on gas and electricity charges this week when chief executive Ian Marchant is due to announce a “significant” increase in its latest profits.

The group has warned that there is little chance of further price cuts this year after it reduced electricity bills by 9% and gas prices by 4% at the end of March.

But figures for the six months after the price cuts, due to be released on Wednesday, will demonstrate that the Scottish Hydro group is still earning massive profits from its nine million domestic and business customers.

Analysts have dismissed speculation that total earnings at SSE could have doubled from the £302 million achieved last time, but most still expect the figure to rise by about two-thirds to just short of £500m.

One observer commented: “Much of it is down to the fact that last year’s profits were exceptionally low as a result of plant outages and other factors, but there is little doubt that SSE and the other major suppliers have been enjoying unusually benign trading conditions.”

Industry regulator Ofgem, which has been pressing for price cuts, has estimated that falling wholesale prices for both gas and electricity mean that SSE and the other big supply companies are now achieving annual gross profits of £170 for every dual-fuel customer, up from an average of £110 over the past three years.

Much of the profit is expected to come from gas customers following a particularly sharp fall in wholesale prices and the Energy Supply Contract Company has forecast that “moderately low” prices will remain for the next three years.

And it is understood that the International Energy Agency will predict a future supply glut in a report due out next week which will assess the impact of new pipelines and liquefied natural gas terminals due come on stream over the next few years.

SSE is expected to conduct a rigorous defence of its policies when it produces its results.

A spokesman said: “Of course we would be delighted to reward our customers and please the politicians by announcing price cuts, but we have to look to the future. Market conditions remain highly volatile and nobody would thank us if we had to reverse any move next year.”

He pointed out that wholesale supplies account for less than half of total costs when the group calculates its charges – rising distribution costs and wages, together with the cost of the group’s near-£7 billion investment programme, are at least as important.

Similarly, he stressed that less than 40% of profits could be directly attributed to domestic customers.

And despite the prospect of bumper interim results, SSE shares were trading near their year’s low on the stock market last week as analysts factored in the prospects of lower demand from major business customers and belt-tightening by private consumers. The shares closed at 1075p on Friday.

Most believe the group could actually turn in lower second-half figures when compared with the bumper returns from higher prices ruling a year ago, and predict only a modest increase in annual profits to just above the £1.3bn level given normal winter weather.

But customer disappointment over charges is likely to be heightened by confirmation that directors will authorise another inflation-busting rise in dividend payments to shareholders this year.

SSE and Centrica’s British Gas are the only two major suppliers to remain British-owned and the Scottish company has consistently topped the customer satisfaction tables compiled by the consumer magazine Which?.

While the Perth-based company will come under the spotlight next week as it produces its results, there is little doubt that the other major companies have also cashed in on the market conditions of recent months.

Centrica, for example, has disclosed a 50% jump in British Gas operating profits to £478m for an earlier six-month period that included the tail end of last winter.

Figures for the British subsidiaries of overseas companies are clouded by currency factors and other charges, although the Spanish Iberdrola recently reported that ScottishPower achieved earnings before interest, depreciation and amortisation charges of some €1.077bn (about £968m) over its latest nine-month period, slightly lower in terms of the European currency.

l Despite its current demands for the energy companies to lower their prices, watchdog Ofgem has warned that the charges will have to rise by up to 60% over the next decade to help pay for a £200m investment programme to boost generating capacity and reduce greenhouse emissions.