Centrica British Gas Profits Fall Due to Warmer Weather and Fixed Tariffs in 2023

British Gas owner Centrica's profits fell by almost half to £814 million in 2023, a big drop from £1.55 billion last year, mainly due to less heating use from warm weather.
By Newsroom | Business, Energy |

Centrica, the company behind British Gas, has announced a significant decrease in its profits for the past year. This reduction is primarily attributed to warmer weather experienced in the UK, which led customers to use less heating, and a trend of consumers switching to cheaper fixed-rate energy tariffs.

The company reported underlying operating profits of £814 million for the year, a notable drop from £1.55 billion in the previous year. While trading conditions were described as difficult, British Gas managed to increase its customer base for the first time in over a decade. This growth was partly fueled by acquiring customers from failed energy suppliers such as Rebel Energy and Tomato Energy.

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To navigate these challenges and invest in its future, Centrica has decided to pause its share buyback program. The company plans to allocate substantial funds, estimated between £600-800 million per year until 2028, towards its investment plans. These investments include a £1.3 billion stake in the new Sizewell C nuclear power plant.

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Warmer Weather Dampens Energy Demand

The milder weather in the UK directly impacted British Gas's performance. With households turning down their heating, the demand for energy decreased, resulting in a financial hit.

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  • £80 million was the estimated financial impact on British Gas due to warmer weather, as reported by multiple sources.

  • In a previous period, the household supply arm experienced a £50 million reduction in earnings due to unseasonably warm conditions, with April being recorded as the third warmest on record.

This suggests a consistent trend of warmer weather negatively affecting the company's earnings from energy sales.

Shift to Fixed-Rate Tariffs Affects Earnings

Beyond weather patterns, the energy market saw a notable shift in customer preferences towards fixed-rate tariffs. This move away from variable rates impacted the profitability of Centrica's residential supply business.

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  • Operating profits in the residential supply business fell by 39% to £163 million last year.

  • The switch to cheaper fixed-rate tariffs from variable rates was explicitly cited as a reason for the profit slump.

The question arises whether this shift is a temporary adjustment by consumers or a more permanent change in how energy is purchased.

Customer Growth Outpaces Profit Decline

Despite the decrease in profits, British Gas has achieved a significant milestone by growing its customer numbers. This indicates a potential for future revenue growth, even with current market pressures.

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  • British Gas added 91,000 customers, marking the first customer base increase in over ten years.

  • The total number of households supplied by British Gas reached 7.5 million after integrating customers from defunct suppliers.

This customer acquisition suggests that British Gas remains a competitive option for consumers, even as market conditions pose financial challenges.

Investment Strategy and Share Buybacks

In response to the challenging financial landscape and to fund future growth, Centrica is reallocating its resources. The decision to pause share buybacks underscores a commitment to long-term investment.

  • Centrica plans to invest between £600-800 million annually in its business until 2028.

  • This investment strategy is aimed at creating "lasting value for shareholders."

  • A significant portion of recent spending included £1.3 billion for a 15% stake in the Sizewell C nuclear power plant.

The equity analyst, Aarin Chiekrie, noted that these investments could strain cash flows if returns are not as anticipated.

Expert Perspectives

Market analysts offer insights into Centrica's performance and strategic decisions.

"British Gas owner Centrica’s headline numbers were a tough read as energy markets adjusted to more normalised conditions." - Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

"Results aren’t going to come cheap or quickly, though, with between £600-800 million per year set to be invested in the transition out to 2028, which could put a strain on cash flows if returns aren’t as high or quick as planned." - Aarin Chiekrie.

"However, we have remained disciplined, delivering strong operational performance and achieving customer growth across all our retail businesses simultaneously for the first time in over a decade." - Chris O'Shea, Chief Executive of Centrica.

Conclusion and Future Outlook

Centrica's latest financial results highlight the interplay of external factors, such as weather, and internal strategic decisions in shaping corporate performance. The warmer weather and the consumer shift towards fixed-rate tariffs have demonstrably reduced profits. However, the company's success in growing its customer base for the first time in a decade, coupled with a significant investment strategy, indicates a forward-looking approach.

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The decision to pause share buybacks to prioritize investments in the business, including a major commitment to the Sizewell C nuclear project, signals a long-term vision. The success of this strategy will depend on the realization of returns from these substantial investments. The market will likely monitor how effectively Centrica navigates fluctuating energy demand and evolving consumer energy choices in the coming years.

Sources

Frequently Asked Questions

Q: Why did Centrica's profits go down in 2023?
Centrica, the company that owns British Gas, reported lower profits of £814 million for 2023. This was because the UK had warmer weather, so people used less heating, and more customers moved to cheaper, fixed energy price plans.
Q: How much did warmer weather affect British Gas?
The warmer weather in the UK last year cost British Gas about £80 million. This is because people needed less energy to heat their homes, leading to lower sales for the company.
Q: Did more people choose fixed energy prices instead of variable ones?
Yes, many customers switched from variable energy tariffs to cheaper fixed-rate tariffs. This change in customer choice also caused a drop in profits for British Gas's home energy supply business, which fell by 39% to £163 million.
Q: Did British Gas lose customers because of lower profits?
No, surprisingly, British Gas added 91,000 new customers in 2023. This is the first time its customer numbers have grown in over ten years, reaching a total of 7.5 million households.
Q: What is Centrica doing with its money for the future?
Centrica is pausing its share buyback program to invest more money into its business. They plan to spend between £600 million and £800 million each year until 2028, including a large investment in the Sizewell C nuclear power plant.
Q: What do experts say about Centrica's results?
Experts like Aarin Chiekrie from Hargreaves Lansdown noted that Centrica's results were tough due to normal energy market conditions. He also warned that the large investments planned until 2028 could affect cash flow if they don't bring good returns quickly.