Closing summary
Time to wrap up - here are today’s main stories.
Goodnight. GW
Aluminium hits 14-year high
In another sign of inflationary pressures, the aluminium price has hit its highest level since 2008.
Aluminium jumped as high as $3,236 per tonne today, fuelled by concern over tight supply and falling inventories.
The light-weight metal is widely used in products from electric cars and aeroplane parts to window frames and cans.
Prices have climbed as China, a major producer, restricted output as part of a drive to cut power consumption and reduce pollution.
An outbreak of COVID-19 in the aluminium-producing Chinese city of Baise also fuelled concerns that production could slow.
#UPDATE The price of aluminium surged to a 14-year peak of $3,236 per tonne on Tuesday on fears of stretched global supplies, partly due to China placing the city of Baise -- a key producer of the base metal -- in Covid lockdown pic.twitter.com/qS0vdJ9Ao6
— AFP News Agency (@AFP) February 8, 2022
France’s economic recovery will slow this quarter as the Omicron variant hits growth, before a spring rebound, statistics body INSEE has forecast.
INSEE predicts that French GDP will rise by 0.3% in the current quarter, much slower than the 0.7% expansion in October-December. That’s down from 0.4% forecast in December.
But the growth rate was then seen doubling to 0.6% in the second quarter, with household spending rebounding as the health situation improves.
INSEE also predicts inflation will rise in the next few months, from 2.9% in January to 3.4% by mid-year, before easing back.
In the City, the FTSE 100 has closed 6 points lower at 7567, down 0.1% tonight.
Ocado led the fallers, sinking 13% to close at £12.25, the lowest since the end of March 2020, with news of its widening losses and high spending on investment worrying shareholders.
Michael Hewson of CMC Markets says:
Also on the slide, Ocado shares have slid to 22-month lows, despite improving full year revenues to £2.5bn, a decent improvement on last years £2.3bn.
However, a big increase in costs has seen group EBITDA fall to £61m, while losses increased to £176.9m, a big fall from last years £52.3m loss. Higher capital expenditure of £680.4m over the year, along with higher spending of £800m for 2022 has raised concerns as to the timeline of when shareholders are likely to see the business return a profit.
Oil companies also fell, tracking the drop in crude prices, while travel and hospitality companies rallied on hopes that the pandemic may be easing. IAG, which owns British Airways, jumped 3.7%.
On the smaller FTSE 250 index, cruise operator Carnival and transport group National Express both gained 6%.
Across Europe, Germany’s DAX and France’s CAC both gained around 0.25%.
Unite roasts 'useless Ofgem'
The Unite union has heavily criticised energy regulator Ofgem after it admitted to MPs that it had failed to properly monitor the financial health of suppliers.
Unite general secretary Sharon Graham said the ‘useless’ regulator had blundered by allowing financially precarious companies to enter the market, before the surge in wholesale prices drove many to the wall.
“Ofgem is not a watchdog but a lapdog that has allowed half-baked Tory ideas about diversification to turn an already broken energy market into a even greater calamity.
“The lacklustre and complacent performance today by Ofgem’s representatives is a clear indication of the total ineffectiveness of the entire regulatory system that is supposed to hold the energy giants in check.
No wonder we have the highest energy costs in Europe and rocketing fuel poverty.
As we covered earlier, Ofgem CEO Jonathan Brearley told the Business select committee that closer financial scrutiny of suppliers was needed (although that’s too late for the 29 which have gone bust), and he blamed a focus on increasing competition to challenge incumbent suppliers.
US trade deficit at alltime record
The US trade deficit has hit a record high, as America’s consumers and businesses spent heavily on imported goods as the economy recovered.
The gap between US imports and exports jumped by 27% during 2021, to hit $859.1bn, up from $676.7bn in 2020.
The surge was driven by a $168.7bn increase in the goods deficit, to $1,090bn and a decrease in the services surplus of $13.8bn to $231.5 billion.
Imports of industrial supplies and materials increased by $169.7bn. That included a $56.3bn rise in crude oil imports, with rising prices pushing up the bill.
There was also a $126.8bn surge in consumer goods imports, from mobile phones and games consoles to clothing:
- Cell phones and other household goods increased $22.9bn.
- Toys, games, and sporting goods increased $16.7bn
- Cotton apparel and household goods increased $11.3bn
With America’s economy growing strongly last year, capital goods such as machinery and parts jumped by $117.5bn, including:
- Electric apparatus increased $16.2bn.
- Computer accessories increased $12.9bn.
- Medical equipment increased $12.3bn.
- Semiconductors increased $11.1bn
Updated
Another interesting energy story today, is that thousands of homes could soon be paid to halve their electricity usage for a couple of hours daily when the UK’s power demand is high.
The scheme to help reduce energy bills and create a zero carbon power supply system, our energy correspondent Jillian Ambrose explained this morning:
From next week the trial by Octopus Energy and National Grid’s electricity system operator will offer the household supplier’s customers the chance to earn money by cutting their power use by between 40% and 60% below normal levels during a set two-hour period.
They could be asked to delay a laundry cycle or a dishwasher load when demand on the UK’s power grid typically climbs, such as between 9am and 11am and again between 4.30pm and 6.30pm. If they meet their electricity reduction targets they could earn up to 35p for every kilowatt-hour of electricity saved.
Households will be told about each two-hour trial window by 4pm the day before it is scheduled, so they can choose in advance whether to opt-in or not. Octopus Energy is poised to invite 1.4m of its customers with an installed smart meter to take part from Friday this week, and expects about 100,000 homes to sign up for the trial which runs until the end of March.
The trial could be a welcome opportunity for eligible households after the energy regulator warned that the cap on energy tariffs would soar by almost £700 from April to an average of about £2,000 a year to reflect the recent surge in global gas market prices.
Pfizer revenues doubled in 2021 on Covid vaccine sales
Pharmaceuticals giant Pfizer almost doubled its sales last year, thanks to its Covid-19 vaccine, and predicted a bumper 2022 lifted by sales of its Covid-19 pill, Paxlovid.
Pfizer has reported that its full-year revenues jumped 95% in 2021 to $81.3bn, up from $41.7bn in 2020.
Most of the increase was due to almost $37bn of revenues from Comirnaty, its Covid-19 vaccine developed with BionTech. Without it, revenues were only up 6%.
Adjusted income almost doubled too, to $25.2bn.
Pfizer is also expecting to sell another $32bn of Comirnaty this year, based on contracts already signed. It also anticipates $22bn of revenue for Paxlovid, its oral antiviral treatment for Covid-19.
That would lift revenues in 2022 to a record, between $98bn and $102.0bn, with Pfizer predicting a 46% jump in adjusted diluted earnings per share.
Dr Albert Bourla, Pfizer’s chairman and CEO, says:
“In the early days of the COVID-19 pandemic, we committed to use all of the resources and expertise we had at our disposal to help protect populations globally against this deadly virus, as well as to offer treatments to help avoid the worst outcomes when infections do occur. We put billions of dollars of capital on the line in pursuit of those goals, not knowing whether those investments would ever pay off.
Now, less than two years since we made that commitment, we are proud to say that we have delivered both the first FDA-authorized vaccine against COVID-19 (with our partner, BioNTech) and the first FDA-authorized oral treatment for COVID-19.”
But Global Justice Now, a social justice group, has accused Pfizer of profiteering from the pandemic.
Tim Bierley, pharma campaigner at Global Justice Now, said the vaccine monopolies enjoyed by pharmaceutical firms need to be broken:
“The development of mRNA vaccines should have revolutionised the global covid response. But we’ve let Pfizer withhold this essential medical innovation from much of the world, all while ripping off public health systems with an eye-watering mark-up.
“Right now, there are billions of people who cannot access Covid-19 vaccines and treatments. Many are in countries with the facilities needed to manufacture mRNA jabs, but Pfizer’s jealous guarding of its patent stands in the way. And we’re seeing thousands of preventable deaths each day as a result.
Wall Street, meanwhile, isn’t impressed with the new forecasts. Shares in Pfizer have fallen by around 6%, with investors having expected even higher Covid-19 sales this year.
Stocks on Wall Street have opened cautiously, as anxiety over likely interest rate rises this year weigh on investors’ minds.
The S&P 500 index of US companies has dipped by 0.2%.
Energy stocks are leading the selloff, following the dip in crude prices, followed by communications, real estate, healthcare, consumer discretionary stocks and technology firms.
The Dow Jones industrial average of 30 large US stocks is 0.2% higher, but the tech-focused Nasdaq is down 0.4%.
Updated
Oil has dropped back from its highest level in seven years, as talks with Iran that could revive an international nuclear agreement resume.
Brent crude has dropped by 2% today to about $90.80 per barrel, having hit $94/barrel on Monday for the first time since October 2014.
The negotiations, attended by China, France, Germany, Russia, United Kingdom, Iran and the US, are resuming in Vienna after being halted at the end of last month.
If a deal is reached, and sanctions on Iran are lifted, then more than one million barrels of oil per day could enter the market. That’s over 1% of global production, which would help to ease tight supplies.
BRENT CRUDE OIL DROPPED 7 YEAR HIGH
— FxOverseas (@FxOverseas) February 8, 2022
1) #US-Iran to resume talks – potential return of Iranian oil supply sends oil lower
2) Brent crude oil drops from 7-year high as #RSI confirmed oversold signal
3) Key Brent #crudeoil technical levels analyzed pic.twitter.com/aZGqGNh4aA
Ricardo Evangelista, senior analyst at ActivTrades, explains:
The revival of indirect talks between the US and Iran could lead – in a best case scenario – to the reopening of international markets to Iranian oil.
Oil price sentiment has been dominated by the imbalance between supply and demand, and in such a tight market, the mere possibility – albeit not a very clear-cut one – of increased supply was sufficient to take some of the pressure off the price of the barrel.
Updated
Back in the markets, the UK’s FTSE 100 index of blue-chip shares has lost its earlier gains, and trading flat.
Ocado is still the top faller, now down 18% at its lowest since March 2020, around £11.55 – around 60% below its record high of £29 set in September 2020.
The selloff came after the online grocery business warned this morning that increased spending to fund international expansion would hurt its profits.
It also reported a wider pre-tax loss for 2021 and said shortages of workers had hit sales growth in the second half of last year (see earlier post).
Updated
Peloton cuts 2,800 jobs in shake-up
Peloton, the troubled exercise equipment company, is replacing its chief executive and planning to axe 2,800 jobs as it deals with a post-pandemic sales crash.
Co-founder John Foley, who has led the company for its entire 10-year existence, will step down as chief executive and become executive chair, the company told the Wall Street Journal, while the company will cut about 20% of corporate positions.
The move comes weeks after activist investor Blackwell Capital called for Peloton to fire Foley and explore a sale of the company. Amazon and Nike have reportedly expressed interest.
Barry McCarthy, former chief financial officer of Spotify and Netflix, will become chief executive and president and join Peloton’s board, according to the Journal.
TUI: UK summer holiday bookings up a fifth on pre-Covid levels
The cost of living squeeze, and the looming spike in energy bills, hasn’t deterred some households from planning trips abroad this summer.
Tui has said UK customers’ holiday bookings this summer are nearly a fifth higher than before the pandemic, with a rise in long-haul trips to the Caribbean and Cape Verde thanks in part to less strict Covid rules, my colleague Julia Kollewe writes.
The travel firm has had a total of 6m bookings for this winter and the summer. In November and December, bookings were affected by the spread of the Omicron variant and fresh Covid-19 restrictions, but Omicron is no longer an issue, its chief executive, Fritz Joussen, said.
Holiday bookings have picked up since the start of the new year, as people grew more confident about travelling and the government relaxed testing requirements for travellers. UK summer bookings are up 19% on the summer of 2019 and Tui expects summer bookings overall to be close to pre-pandemic levels.
Joussen said many UK households had accumulated high savings over the pandemic and were eager to travel. Long-haul destinations such as the Caribbean and Cape Verde were popular, he said, and customers are buying more upmarket holiday packages as they want to treat themselves after two years of the pandemic.
Joussen said:
People are selecting holidays that are more expensive. Rather than going to the Canaries, they are going to the Caribbean.
Updated
Energy price rises will hurt finances, health and wellbeing of poorest households
MPs have been warned that the 54% increase in energy bills in April will have an immediate, serious impact on households – especially those already struggling.
Jonathan Marshall, senior economist at Resolution Foundation, told the BEIS committee that in 2014, the last time fossil fuel prices surged, people cut back on social spending such as going to the pub or restaurant.
But this time, the price cap means the overnight increase in bills will be “much more of a shock”, so families could be forced to cut non-discretionary spending, such as bills.
Peter Smith, director of policy & advocacy at charity National Energy Action warned that the people who will be hardest hit by rising energy bills are on the lowest incomes, in the least fuel-efficient homes.
Households will be making trade-offs about which essential goods and services they can afford, he agrees.
Smith warned:
People used to talk about the choice between heating or eating. It’s getting to a situation where people won’t be able to do either satisfactorily.
These rises will have massive, massive impacts on the poorest households, not only decimating their finances but also their health and wellbeing for a long time to come, sadly.
There will be 6.5m UK households who can’t keep their houses warm, he continues.
That doesn’t take into account the government’s proposals last week – because some poorest households won’t benefit from the £150 council tax rebate on properties in bands A-D.
And the £200 temporary cut to energy bills announced by chancellor Rishi Sunak must be repaid, so is only a loan (repaid at £40/year for the next five years).
Smith says National Energy Action are “bitterly disappointed” that the government hasn’t honoured its commitment to ensure interventions in the energy market would be targeted at the poorest households.
Powerful from Peter Smith, director of policy & advocacy, National Energy Action at the BEIS select committee just now:
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
“People used to talk about being the choice between heating or eating but it’s getting to a situation where people aren't able to do either satisfactorily."
Smith has been extremely critical of the govt's announcements.
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
He says some households are exempt from council tax so won't benefit from the rebate, says it's not good 'heat now, pay later' proposal isn't good because it's regardless of incomehttps://t.co/2RJCB4UMxY
Peter Smith, director of policy & advocacy, National Energy Action:
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
"We're gearing up for an absolute firestorm, we're already seeing huge surges in demand, I think we've got to be honest in our abilities as a charity... to be able to cope with the scale of.. demand [for help]."
Here are more key points from the hearing, from Yahoo News’s Nadine Batchelor-Hunt:
Emma Pinchbeck, chief executive, Energy UK says there are other ways you can help people in fuel poverty including moving VAT off bills, investing in energy efficiency for homes (i.e insulation etc).
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
She says around 6m households are in fuel poverty in the UK.
Pinchbeck says the govt have clearly changed their approach since Sept and seen they need to play a role in the crisis.
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
She says the support from the government support is "good" but there are "other things they could do, and could still do" and that...
... they only got the details when the public did, and "the devil is in the details".
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
She says "there are some gap" including for businesses, and that the support doesn't come in until October for what is an "enduring crisis".
Updated
Full story: Ofgem admits it should have acted sooner to protect UK households
The energy industry regulator has admitted that British households would have been better off weathering the winter gas crisis if it had acted sooner to crack down on financially unstable energy suppliers.
The Ofgem chief executive, Jonathan Brearley, told MPs that households could face a bill of about £200m to cover the costs left by a string of energy provider collapses since gas market prices rocketed to record highs last September.
“We need a retail sector that’s more resilient and more able to deal with the kind of shock that we’ve seen,” Brearley told the Commons business select committee.
“And to be clear, chair, we accept that had we done that earlier this would have been better for customers.”
The Ofgem boss, who stepped into the role in February 2020, identified multiple missed opportunities to strengthen the rules for energy suppliers that could have helped to avoid the number of supplier collapses, and the related costs for bill payers and the Treasury.
Instead, regulatory decisions had been “dominated” by the desire to create more competition by increasing the diversity of suppliers within the market but that new regulation to protect customers against poorly-run companies was not put forward “with the pace and scale that I think with hindsight that we needed”.
Ofgem admits it should have acted sooner to protect UK households https://t.co/ZNXtvOq4wo
— The Guardian (@guardian) February 8, 2022
Q: It feels that Ofgem is good for benign times, and long-term transitions, but you’re rather struggling at the moment. Is that fair?
Jonathan Brearley (who became CEO two years ago) rejects it, saying the regulator has protected 4 million customers whose suppliers failed, and reforming its frameworks.
Ofgem has ‘moved incredibly quickly to respond to the crisis’, he claims, but adds there are lessons to learn - including how frameworks were set up in the past, and some decisions made.
Q: What are the consequences for Ofgem executives for bad calls, such as not imposing tighter financial regulation and the £200m of consumer credit lost at failed suppliers? The top five of you rake in a million pound a year and have two million pounds in your pension funds....
Brearley says performance is assessed by Ofgem’s board, GEMA, but a lot of those calls were made by former executives.
He repeats Ofgem has lessons to learn, and is making changes.
Going back to the financial resiliency failings...
Q: Some energy suppliers have been setting up businesses in their bedrooms. That’s completely wrong. Where did the responsibility lie -- with Ofgem or government?
Ofgem’s Jonathan Brearley says there was a shared ambition to improve competition. And there was a time when Ofgem’s focus was on diversifying the market, rather than the financial resiliency of entrants.
With hindsight we’d have done something differently.
Ofgem: We need powers of redress against failed companies
Q: What redress does Ofgem have against companies who enter the energy market offering low prices, win customers, pay themselves a lot of money as executives, and then go bust?
We don’t have redress on those circumstances, Jonathan Brearley tells the committee.
Q: Should you have?
I think we should, yes, Ofgem’s CEO replies.
Q: Why have 29 energy suppliers gone bust in the last year?
Jonathan Brearley says there are three factors. The rise in the gas price, the fact that some suppliers weren’t financially resilient, and the price cap which prevented them from raising prices in response.
Q: Major oil companies are making large profits -- would a windfall tax help consumers?
Ofgem CEO Jonathan Brearley ducks this question.... saying as a regulator, he’s told not to get involved in government policy, and definitely not in tax decisions.
Ofgem CEO is asked if a Windfall tax is a good idea on the massive profits of companies like BP.
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
He says: "Look, there's two things I'm told as a regulator: one is not to get involved in policy; and the second, is definitely not to get involved in tax decisions."
Q: If the UK had more gas storage, would that lower energy bills?
Brearley says it would only have a marginal impact on overall bills, given the global market for gas
(the UK doesn’t get much directly gas from Russia, for example, but Russian supplies have a big impact on prices).
More storage would help with energy resiliency, though.
Q: Is the price cap going up again in October?
We don’t know, Jonathan Brearley replies.
The forwards markets [of future energy prices] show upward pressure now, but they have been ‘extremely bad predictors’ of what might happen in October, he says.
Q: Why didn’t you act faster when wholesale prices began surging in July and August?
Brearley says Ofgem expected that energy supplies would increase - it didn’t expect market dynamics to change as they did.
Q: Why did you think supplies would rise?
Brearley points to the amount of gas that has come from Russia, which had a ‘dramatic increase’ on prices at times, given the low gas storage levels in Europe.
The problem wasn’t about how many holes in the ground there were, it was about how full they were - and they weren’t filled with Russian gas, Brearley adds.
Background: European gas prices hit record levels last autumn as supplies became tight.
Russia denied restricting supplies, even though a pipeline to Germany switched direction and flowed eastwards for some says late last year, keeping prices near record highs.
Updated
On the cost of green energy, Ofgem says that levies on bills are coming down, as renewables projects are now paying back to customers.
And on the energy price cap rises, Brearley says he knows it will have a huge impact on families.
He adds that the scale of the rises can only be met by government action.
Jonathan Brearley, CEO of Ofgem, says the govt are the only ones that can tackle the energy bill crisis at this point.
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
"We do have a voluntary agreement with the industry. But, quite frankly, the scale of these rises really can only be met with government action," he says.
Updated
Ofgem: Ukraine invasion would drive energy prices higher
Q: What would happen to energy bills if Russia invaded Ukraine?
Ofgem CEO’s Jonathan Brearley tells the BEIS committee that this would lead to ‘significant rises’ in the price people pay for energy, as it would push up the wholesale costs.
The futures market for next winter is suggesting that there could be another increase in the price cap, in October. But the data-collection process has only just begun, so wholesale prices could well change before the cap is set in August.
But there’s no doubt that conflict over Ukraine could push up bills in the autumn, on top of the 54% jump in the price cap coming in April (the £693 average rise announced last week).
Brearley says:
We expect if Russia invades Ukraine, and there is a sanctions regime that meant Russia limited gas to Europe, that would drive high price rises and yes, that would ultimately feed through to customers.
And that could be of the scale of what we’ve seen before.
Updated
Jonathan Brearley says there was a very dark moment at Ofgem just before Christmas when wholesale gas prices hit record highs of 450p per therm.
Prices have dropped back since -- the day-ahead gas price is now 189p per therm. That’s still historically very high -- it was below 60p a year ago.
He says the regulator does also have concerns about turbulence if prices were to fall very quickly too.
``We do have concerns about prices falling extremely quickly'' too and the havoc that would cause
— Rachel Morison (@rachelmorison) February 8, 2022
Q: Do you accept that poor decision making has led to customers paying higher bills?
Ofgem CEO Jonathan Brearley defends the regulator’s decision to focus on bringing more competition into the market.
There was enormous pressure (including from MPs) and concern that customers were getting poor service and poor value from the incumbents.
But the regulator should have been more careful about the financial resilience about the suppliers who came into the market, he repeats.
Ofgem CEO Jonathan Brearley then concedes that the regulator didn’t monitor energy suppliers financial resilience closely enough, before the pandemic.
Ofgem now gets weekly information from suppliers on their hedging position (how well they are covered against volatility in the wholesale market), and their financial position, he tells the BEIS committee.
Suppliers are now being asked to run stress tests too, to show their position under various scenarios.
Q: Why wasn’t that done before? (another excellent question).
Brearley says that the regulator’s previous financial responsibility proposals had been focused at the edge of the market -- it now needs something much more comprehensive.
But before Covid, Ofgem only had a watchlist of companies, based on indicators of financial stress such as delays to paying renewables levies)
Q: So pre-Covid, there wasn’t active supervision and reporting of energy companies’ financial position?
Certainly not to the extent there should have been, no, Brearley agrees.
Q: Why wasn’t consumer money ringfenced so that energy suppliers couldn’t spend it on other business costs?
Ofgem’s Jonathan Brearley says a proposal to make suppliers return unspent credit balances was being implemented, but hadn’t been finalised.
But there were arguments that this would have made it harder for small suppliers to operate (thus not boosting competition). But he agrees accounts should be ring-fenced, so that they’re protected in an administration - and proposals will be brought forward next month.
Q: You started discussing this in March 2021 -- why couldn’t it happen sooner?
Brearley says the consultation with industry took time.
Q: But is it right that consumer have to pay £200m of their money, to cover credit belonging to their fellow consumers that was lost at energy companies which went bankrupt because they weren’t regulated properly?
With hindsight, we should have ringfenced credit balances more firmly, Brearley agrees.
But the only way to recover costs is by putting them on energy bills, and this lost consumer credit is only a small proportion of the ‘supplier of last resort’ process, he adds.
Brearley tells MPs companies are covering the lost £200m via the energy price cap from consumers
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
He agrees with MPs that consumer money should have been, and should be, ringfenced but insists there's no other way to recuperate the costs
Ofgem: £200m of customer credit could have vanished at failed suppliers
Q: How much consumer credit has been lost at suppliers who have failed in the current crisis? The CEO of Centrica (Chris O’Shea) has estimated that £400m has gone missing - is he right?
Ofgem CEO Jonathan Brearley estimates that the final bill will be lower, but it could still be around £200m.
That’s still a shocking amount of money to have vanished in the crisis -- and which households will end up paying.
Last week’s price cap announcement included £2.45 on our energy bills to cover £54m of lost consumer credit. But that final bill will be more.
The final costs could be about £10 on everyone’s bills, Brearley estimates.
Q: So if £2.45 accounts for £54m of lost credit, £10 would be £200m, asks Darren Jones MP?
Something of that order of magnitude, yes, Brearley replies, but the figures are still being worked out.
CEO of Ofgem Jonathan Brearley tells a BEIS Select Committee meeting that up to £200 million of consumer money has "gone missing" amid energy companies going bust
— Nadine Batchelor-Hunt (@nadinebh_) February 8, 2022
This lost consumer credit is around 10% of the total cost of moving customers onto new suppliers. Around 85% of the cost of the “supplier of last resort levy” was in ‘rehedging’ customers, Brearley explains.
As my colleague Nils Pratley wrote in today’s Guardian, those missing balances are replaced via charges on everybody’s bills. In effect, we all pay for the missing millions.
Nils wrote:
It’s not as if Ofgem was unaware of the danger. In March last year – so a few months before gas prices surged – the regulator announced it was “concerned that some suppliers may use customers’ surplus credit balances to fund otherwise unsustainable business practices”.
That concern was well founded: the predictable car crash happened.
Updated
Q: Why did it take an energy crisis for Ofgem to recognise things need to change?
Brearley says that the consensus has been that the energy market needed to diversify.
That was the number one priority in the mid-2010s, so the focus was on getting smaller suppliers into the market to increase competition and challenge the dominance of the big incumbents.
So some measures were not implemented at the pace or scale that, with hindsight, was needed.
Brearley says that focus on competition should have been combined with more financial resilience.
Pursuit of competition in the energy market was the top priority, says Brearley. "There was a view that we needed to encourage small suppliers into the market."
— Emily Gosden (@emilygosden) February 8, 2022
Ofgem CEO Jonathan Brearley adds that the regulator’s relationship with suppliers needs to change.
That means working “more closely and collaboratively” with the sector.
If we are moving to a sector which is less reliant on switching as the only mechanism to drive up performance and manage price, then we need a different form of regulation. he tells MPs.
On an optimistic note, Brearley says we could build a retail sector that can handle the current problems and get to net-zero in a more cost-effective way.
Updated
Ofgem CEO: We should have been tougher with energy suppliers before crisis
BEIS committee chairman Darren Jones MP begins today’s hearing by comparing the crisis in the energy market to the financial crisis, and asking if Ofgem has failed to effectively regulate and manage the sector.
Jones points out that 29 suppliers have gone bust since the start of last year, meaning £2.5bn could be loaded onto customer’s bills to pay for those failures.
Ofgem CEO Jonathan Brearley says there have been unprecedented changes in the wholesale energy market, with gas prices this winter five times higher than a year ago.
That has led to a huge rise in bills, and Brearley says he knows that £700 increase in energy bills announced last week will be very worrying for customers, when they’re also facing “other, much bigger financial pressures”.
And on top of that, around four million people have been affected by the collapse of those 29 suppliers, Brearley adds.
As a regulator, I hope we never have to go through either of those two things again.
Brearley adds that Ofgem did protect protected customers, by ensuring their energy supplies and credit balances were maintained as they moved to new suppliers.
But our regulation needs to change, he adds.
Brearley says the price cap did protect customers through the winter. But it must become more adaptable and flexible to keep up with volatile energy prices (Ofgem is proposing changing it every three months, not twice a year as at present).
And “financial regulation needs to be tougher”, Brearley says, admitting that Ofgem should have done this before the crisis.
We need a retail sector that is more resilient, and more able to deal with the kind of shock that we’ve seen.
We accept that had we done that earlier, this would have been better for customers.
Ofgem boss Jonathan Brearley admits it should have toughened up checks to ensure the financial resilience of suppliers sooner... i.e. before 29 suppliers went bust in a year.
— Emily Gosden (@emilygosden) February 8, 2022
"We accept that had we done this sooner it would have been better for customers," he tells @CommonsBEIS
[Many suppliers failed to hedge themselves against surging wholesale prices, and were unable to cope as the price cap prevented them lifting prices for consumers].
Over in parliament, the Business, Energy and Industrial Strategy Committee are hold a hearing into the UK’s energy market.
They’re looking at energy prices and the impact the energy price cap has on household energy bills.
First up, Jonathan Brearley, Chief Executive Officer of Ofgem, along with Neil Lawrence, the regulator’s retail director, and Neil Kenward, the director of strategy and decarbonisation.
Today's first panel, looking at the impact the energy price cap has on household energy bills, has just started.
— Business, Energy and Industrial Strategy Committee (@CommonsBEIS) February 8, 2022
👥 We're hearing from @ofgem
- Jonathan Brearley, Chief Executive
- Neil Kenward
- Neil Lawrence
Watch live https://t.co/r0iTXqqb7zhttps://t.co/nSOGIkDxHW pic.twitter.com/DSt9t6wxTu
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Here’s our news story on the collapse of Nvidia’s planned acquisition of the Cambridge-based chip designer Arm from Japan’s Softbank:
Ocado hit by worker shortage
Elsewhere this morning, online grocery business Ocado says its growth was held back by a shortage of workers, as its shares slide to their lowest since early in the pandemic.
Ocado reported that retail sales grew by 4.6% last year, and were 41.5% higher than in 2019 before the pandemic spurred demand for online grocery deliveries.
But growth in the second half of last year was held back by the “well documented shortages of labour in the UK retail industry”, Ocado says. A fire at its fulfilment centre in Erith, south-east London also temporarily hit capacity, and led to some others being cancelled.
Ocado grew its customer numbers by 22.4% last year to 832,000, with orders up 11.9% but average basket size down 5.8% to £129.
Tim Steiner, CEO of Ocado Group, said:
“The past year has further reinforced that demand for online grocery is here to stay.
In the majority of mature markets, the fastest growing channel is online and to truly win here food retailers need to deliver the best offer with the best economics across all customer missions.
Ocado made a pre-tax loss of £176.9m for last year, and also warned that core earnings in 2022 would fall short of market expectations as it steps up investment.
Shares in Ocado have tumbled 12% this morning, hitting their lowest since April 2020. They’re trading around £12.41, down from over £28 in February 2021.
...but if you invested during pandemic, on hopes Ocado would massively benefit from boom in online retailing, you'd be very out of pocket. Shares have fallen heavily in last 18months. pic.twitter.com/qIg9r6oa66
— Harry Wallop (@hwallop) February 8, 2022
In other energy news, UK electricity producer SSE has lifted its earnings guidance, thanks to the energy crunch.
A strong financial performance from SSE’s gas-fired power division more than made up for a steep drop in output from its wind power business, which suffered from weak wind speeds across Europe in recent months.
Electricity output from renewable sources was 19% below expectations in the 9 months to December 31 2021, “largely due to the summer months being exceptionally still and dry across the UK and Ireland”.
Electricity output from SSE’s gas-fired plant was down 14% year-on-year. However, that didn’t hurt profits as the firm provided lucrative “vital balancing services to enable a renewables-led system” -- stepping in with extra power when renewable power generation was lower.
Last November, National Grid launched a review of this balancing market, saying there had been some very high-cost days; costs which are ultimately borne by consumers.
SSE now expects full-year adjusted earnings per share to be at least 90p, up from at least 83p forecast in November.
BP also profited from its near 20% stake in Russia’s Rosneft last year, even as tensions between Moscow and the West rise.
BP made almost $2.7bn of pre-tax profits from its stake in the Kremlin-controlled Rosneft during 2021, today’s results show, compared with a loss of $238m in 2020.
BP also banked a $2.7billion profit last year from its stake in Kremlin backed Russian energy giant Rosneft.
— Graham Hiscott (@Grahamhiscott) February 8, 2022
On an underlying basis, profits from Rosneft were $2,451m last year, up from just $53m in 2020.
BP says this recovery is due to higher oil prices and favourable foreign exchange effects during last year. This chart shows the details:
BP's stake in Rosneft has received a bit of media attention in the run up to the results. Here is why. pic.twitter.com/4IAEGDmfqo
— Neil Hume (@humenm) February 8, 2022
In the last quarter alone, BP’s Rosneft stake provided $745m of underlying replacement cost profits before interest and tax, out of total underlying pre-tax RC profits of $7.049bn (or just over $4bn after tax in October-December).
About 10% of BP's underlying profits came from its stake in Kremlin-backed oil giant Rosneft.
— Emily Gosden (@emilygosden) February 8, 2022
While Britain plots tougher sanctions on Russia over Ukraine, BP's boss Bernard Looney sits on its board alongside close Putin ally Igor Sechin and Russia's deputy PM Alexander Novak. https://t.co/gxIbIFh0fD
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Full story: BP reports bumper profits due to soaring gas and oil prices
BP’s annual profits hit an eight-year high of $12.8bn in 2021 as it benefited from a surge in energy prices, prompting renewed calls for a windfall tax on fossil fuel companies to relieve the financial pressure on households facing a sharp rise in bills.
The bumper annual results were boosted by a $4.1bn profit in the final quarter of 2021, as global gas demand recovered and oil prices rallied to seven-year highs.
Annual profits compared with a $5.7bn loss in 2020, when the Covid-19 pandemic reduced demand for energy.
Natural gas and electricity prices have soared since last summer on tight gas supplies and rising demand as economies bounced back from the pandemic, with the stand-off between Russia and Ukraine also pushing gas prices higher.
BP’s results prompted fresh calls for a windfall tax on fossil fuel companies to fund extra help for hard-hit households braced for a sharp rise in energy bills and wider cost of living crisis. Last week, BP’s rival, Shell, reported a quadrupling of 2021 profits to $19.3bn.
Rachel Reeves, Labour’s shadow chancellor and MP for Leeds West, tweeted:
“The chancellor’s energy plans last week left families more worried than ever. It’s time for Labour’s plan for a one-off windfall tax on oil & gas producers to cut bills.”
BP CEO Bernard Looney has rejected calls to impose a windfall tax on British oil and gas producers after the company reported its highest profit in eight years.
“We need to be encouraging investment in natural gas in Britain, not discouraging,” Looney told Reuters.
Here’s ITV’s Joel Hills on BP’s decision to use surplus cash to buy back its shares:
One of the arguments against a windfall tax on energy companies goes that it diminishes their ability to make the vital transition to Net Zero.
— Joel Hills (@ITVJoel) February 8, 2022
This morning, BP has decided to spend an extra $1.5 billion of the proceeds from swollen oil and gas revenues not to up the pace…
…of investment in renewables but to buy back its own shares.
— Joel Hills (@ITVJoel) February 8, 2022
Why not reward shareholders? They deserve a share of the spoils. But the decision also reenforces the idea that BP is a “cash machine” and suggests there’s plenty of excess cash sloshing around.
BP’s shares have hit their highest level since early in the pandemic.
They rose 1.8% in early trading to 416p, for the first time since March 2020, after this morning’s profits beat expectations.
Shareholders will also welcome the news that BP will buy back $1.5bn of shares this quarter using its surplus cash, taking its total buybacks for 2021 to $4.15bn (see earlier post).
This year, BP plans to using 60% of its surplus cash flow for share buybacks, and allocate the remaining 40% to strengthen the balance sheet.
BP profits: City reaction
BP has delivered a strong set of results this morning, says Stuart Lamont, investment manager at Brewin Dolphin:
Buoyed by the rising oil price, BP has swung to a substantial profit, cut debt, invested in its business, and upped its shareholder distributions.
Management is striking a positive tone on its progress as BP transitions towards net zero and the company looks to be in a strong position to deliver on its commitments building up to 2030.”
Richard Hunter, head of markets at interactive investor, says BP is clearly making progress:
Given that the oil price is currently standing at around $92, it is of little surprise that the headline numbers have exceeded expectations. BP’s own projections are based on a price of $60, let alone the “cash balance point” of $42 which the company previously identified.
As such, attributable profit for the year rose to $7.6bn from a previous £20.3bn loss, and the underlying replacement cost profit came in at $12.8bn versus a loss last year of $5.7bn. Indeed, this figure exceeds the $10bn achieved in 2019.
At the same time the significant cash generation has enabled the reduction of net debt, which has fallen to $30.6 billion from a previous figure of $38.9bn. An increased share buyback programme totalling $4.2bn has also become possible while, for traditional income-seeking investors the dividend yield of 3.9% remains relatively punchy in the current environment.
Greenpeace UK’s head of climate Kate Blagojevic says:
“These profits are a slap in the face to the millions of people dreading their next energy bill. BP and Shell are raking in billions from the gas price crisis while enjoying one of the most favourable tax regimes in the world for offshore drillers. And these are the same companies responsible for pushing our world closer to catastrophic climate change. This isn’t right.
“The Chancellor’s response so far has been to protect Big Oil’s profits while offering completely inadequate support for vulnerable households. People will be wondering whose interests he’s serving.
”BP’s boss said his company is like a cash machine [last November]. Rishi Sunak should take the hint and make a very large withdrawal to help struggling families now and cut energy bills in future by insulating more homes
Liberal Democrat Leader Ed Davey is also calling for a windfall tax on energy producers:
“The truth is that this is about basic fairness. It simply cannot be right these energy companies are making super profits whilst people are too scared to turn their radiators on and terrified there will be a cold snap.
The government has said that a windfall tax would harm investment but this is an absolutely bogus argument. These profits have come out of nowhere, no energy company was expecting them, no investor was either.
“A windfall tax is the best way to get money to the people who need it quickly, but also to make sure there is some sense of trust and proportionality in the system.”
During 2021, BP generated surplus cash flow of $6.3bn.
That will fund $4.15bn of share buybacks for last year (a way of passing earnings onto investors), with BP announcing it will buy $1.5bn of shares in the first quarter of this year from 2021 surplus cash flow.
If Brent crude averages $60 per barrel, BP expects to deliver share buybacks of around $4bn per year, and increase its dividend by around 4%, through to 2025.
Brent crude is currently trading at $92 per barrel, close to yesterday’s seven-year high, up from around $50 per barrel at the start of 2021.
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BP has also announced it will pay a dividend of 5.46 cents per share for the last quarter, the same as in Q3, and up from 5.25 cents/share in Q4 2020.
Updated
BP: energy prices could be volatile
BP has also predicted that energy prices could remain volatile this year.
In the outlook section of its financial results, BP says:
- We expect oil supply and demand to move back into balance through 2022; however with lower levels of spare capacity price volatility is likely.
- OPEC+ decision making on production levels continues to be a key factor in oil prices and market rebalancing.
- In gas markets, with ongoing geopolitical uncertainty, and low storage levels, we see the potential for continued price volatility.
- In the first quarter of 2022, we expect industry refining margins to remain broadly flat compared to the fourth quarter of 2021.
Europe entered this winter with its lowest reserves of gas in at least 10 years. The UK has some of the continent’s lowest gas storage capacity, having clsoed its main gas storage site off the east coast in 2017.
“Delivering for shareholders while transforming” - BP boss’s words as he unveils profits at 8-year high of £10bn won’t dampen calls for a windfall tax
— Dharshini David (@DharshiniDavid) February 8, 2022
BP’s profit of $12.8 billion in 2021 is the highest in eight years, says Reuters:
The quarterly results were supported by higher oil and gas prices and production which was partly offset by weaker oil trading results and the impact of higher energy costs on operations such as refining, the company said.
Natural gas and electricity prices around the world have soared since the middle of last year on tight gas supplies and higher demand as economies rebounded from the pandemic.
Labour’s shadow chancellor Rachel Reeves says BP’s jump in profits shows the need for a one-off windfall tax on producers, which could be used to lower energy bills:
BREAKING: Soaring profits from BP, days after Shell recorded ‘momentous’ results.
— Rachel Reeves (@RachelReevesMP) February 8, 2022
The Chancellor’s energy plans last week left families more worried than ever.
It’s time for Labour’s plan for a one-off windfall tax on oil & gas producers to cut bills.https://t.co/dU1iy0eOHG
Introduction: BP profits surge; ARM deal collapses
Good morning, and welcome to out rolling coverage of the world economy, the financial markets, the eurozone and business.
BP has reported a surge in profits as the oil giant cashes in on the jump in oil and gas prices which are fuelling the cost of living crisis.
BP made an underlying replacement cost (RC) profit, its preferred earnings measure, of $4.065bn (£3bn) in the last three months of 2021 alone, up from $3.322bn in July-September.
That’s almost 35 times the $115m RC profit which BP reported in Q4 2020, when the pandemic was hitting energy demand.
BP says its underlying replacement cost profit improved as a result of higher oil and gas prices and refining margins and stronger trading results.
For the full year, BP made underlying profits of $12.8bn, or £9.5bn, as it bounced back from a loss of $5.7bn in 2020 (when the pandemic hit demand and it wrote off billions of assets).
Oil giant BP likely to fuel calls for a windfall after announcing profits equivalent to £378 A SECOND in the final three months of last year on the back of soaring oil and gas prices which have hit households so hard. Q4 profit of $4bn up from $115m a year ago. FY $12.8bn.
— Graham Hiscott (@Grahamhiscott) February 8, 2022
Profit attributable to bp shareholders came in at $7.565bn for 2021, up from a $20.3bn loss in 2020.
BP’s results are certain to intensify calls for energy companies to face windfall taxes to help cover the impact of rising energy bills on households.
Last November, Bernard Looney, BP’s CEO described the company as a “cash machine” after soaring oil and gas prices boosted profits.
This morning, Looney says:
2021 shows bp doing what we said we would - performing while transforming.
We’ve strengthened the balance sheet and grown returns. We’re delivering distributions to shareholders with $4.15 billion of buybacks announced and the dividend increased.
And we’re investing for the future. We’ve made strong progress in our transformation to an integrated energy company: focusing and high grading our hydrocarbons business, growing in convenience and mobility and building with discipline a low carbon energy business - now with over 5GW in offshore wind projects - and significant opportunities in hydrogen.
BP reports $13bn profit for the year (replacement cost measure) - and interestingly has a strategic update out too that stresses its investment plans in the UK. Perhaps an attempt to head off calls for a windfall tax .... @TimesRadio
— Dominic O'Connell (@dominicoc) February 8, 2022
Those high energy prices mean UK households will face a record energy bill increase of 54% from April after the regulator lifted the cap on default tariffs to £1,971.
Later this morning MPs on the Business, Energy and Industrial Strategy (BEIS) Committee will question Jonathan Brearley, CEO of regulator Ofgem, on the energy price cap, and the impact it has on household energy bills.
The other big news of the morning is that SoftBank’s sale of UK-based chip designer Arm to Nvidia has collapsed, after regulators in the UK, the United States and Europe raised serious concerns that the “largest semiconductor chip merger in history” would hurt competition.
The two sides agreed to terminate the deal because of “significant regulatory challenges preventing the consummation of the transaction, despite good faith efforts by the parties,” SoftBank said in a statement (via Bloomberg).
Softbank is now aiming to float Cambridge-based Arm on a stock market.
The failure of the deal is a major setback to the Japanese conglomerate’s efforts to generate funds, at time when valuations across its portfolio are under pressure.
Arm also announced that Rene Haas, head of the company’s intellectual property unit, will become its chief executive, succeeding Simon Segars.
Masayoshi Son, chairman and CEO of SoftBank Group Corp, said in a statement:
“Rene is the right leader to accelerate Arm’s growth as the company looks to re-enter the public markets.”
The agenda
- 10.30am GMT: Business Committee to question Ofgem & energy sector representatives on energy prices & the energy price cap
- 11am GMT: NFIB index of US business optimism for January
- 1.30pm GMT: US trade balance for December
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