Earnings at ScottishPower more than doubled in the first three months of 2023 as the group's retail division surged back into profitability with the repayment of money lost during the tumult across wholesale energy markets last year.
The retail division, which supplies gas and electricity to 4.7 million households across the UK, also saw "some improved business margins" as the energy price cap set by market regulator Ofgem jumped to an annual average of £4,279 from January to the end of March. Households were shielded from this by the UK's Energy Price Guarantee (EPG) which kept the upper limit at £2,500, with the government paying the difference on behalf of consumers.
However, the biggest boost for Glasgow-headquartered ScottishPower was the receipt of what is believed to be more than £250 million in what are known as "backwardation" payments from Ofgem. This money, paid for by the addition of a "backwardation allowance" to the energy price cap, covers losses suffered last year by all suppliers when the price they were allowed to charge customers was less than the wholesale cost of buying in gas and electricity.
“Under the energy price cap, extreme market volatility in 2022 forced all UK energy suppliers to buy energy at peak prices but sell to customers at a loss," a spokesman for ScottishPower said.
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READ MORE: ScottishPower earnings hit £1.6bn - but loses on household bills
"Last year, ScottishPower’s retail business made a loss of £271m because of this impact. Ofgem has moved to fix this and all suppliers will see those costs refunded this year.”
Total earnings by ScottishPower, which is owned by Spain's Iberdrola, rose to £584m in the first three months of this year. That was more than double the £273m posted in the same period 12 months earlier.
This was driven by the retail division which swung from an £85m loss in the first quarter of 2022 to report earnings of £290m.
The majority of the difference was the backwardation payment from Ofgem, which is though to amount to somewhere in the region of 80 per cent of the losses incurred for the whole of last year by the retail operation. This includes both the losses from selling energy at less than wholesale prices, and the loss of profits that would have been made if wholesale and retail prices had been in alignment.
Ofgem is front-loading repayments to suppliers, with smaller additional sums expected in the second quarter of this year.
Elsewhere within the business, earnings in ScottishPower's renewables division fell by £37m to £152m as unfavourable weather conditions impaired generation across the onshore wind portfolio. Onshore accounts for about two-thirds of the company's wind turbines, though there are plans to significantly expand its offshore operations.
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Earnings from the networks division fell by £27m to £138m with demand for energy impaired as cash-strapped homes and businesses cut their consumption. The networks business is responsible for the high-voltage system of pylons that transmit electricity in central and southern Scotland, plus low-voltage timber pole and underground networks in Scotland, northern Wales and Merseyside.
The decrease in demand was also reflected in the retail business with electricity volumes 2.3% lower than in the same period a year earlier, and gas down by 5.8%.
READ MORE: Energy prices devour profits in ScottishPower retail operations
In February, ScottishPower reported a £58m increase in pre-tax earnings to £1.6 billion for the whole of 2022. While the retail business made a loss, renewables earnings were buoyed by last year's windy conditions.
Prices for gas on international markets started soaring in the latter part of 2021 with demand increasing as the global economy began its recovery from the pandemic. This was further exacerbated by Russia's invasion of Ukraine in February 2022.
In the UK, those rising wholesale costs started feeding through into consumers’ bills from the beginning of April 2022 after regulator Ofgem raised its price cap by £693 to take the standard tariff to £1,977 per year for the average UK household.
That Ofgem price cap peaked at £4,279 in the first three months of this year, but has fallen back to currently stand at £3,280.
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