Another perspective on profits

Excessive profits?

An energy retail firm was under investigation by the Competition Markets Authority (CMA) and faced a provisional finding of excessive profitability.

The energy business called on us to support its case.

What about the risk capital?

We conducted detailed analysis that considered not only the level of profits  relative to physical assets, but also the risk associated with matching wholesale energy with retail customer demand.

Our analysis highlighted that an energy retail company operating at scale needs to hold a significant amount of risk capital. We proposed various methods to estimate the impact of this.

When this additional risk capital was taken into account, our client’s returns no longer appeared to be excessive. This formed a vital part of our client’s submission to the CMA.

CMA’s focus changed

As a result of our work, the client was better able to defend its position. The CMA therefore shifted its focus when coming to its final conclusions, acknowledging the level of uncertainty behind its simplistic profitability analysis.