Energy prices double, but suppliers lose money for 5 years. So how on Earth does that work?

A picture is worth a thousand words. Have a look at this, an excellent piece of work from Ofgem:

The chart shows the average net margin on a dual fuel energy account, and goes a long way to explaining the mysterious behaviour of the UK energy market. It's a classic case study in sticky prices: the retailer is 'caught out' by steeply rising prices in the wholesale market, and can't push prices up to consumers quickly enough. Net margins turn negative around August 2004 ... and they don't recover for nearly 5 years.

Horrendous industry, you might think. But the flip side is a 20-fold increase in generation profits. So as long as you are in generation and retail, none of the above matters. What the chart really tells you is that energy retail is just a hedging option for generators, against inevitable periods of low wholesale prices.

So what of the sticky prices thing? One way to think about those is as a barrier to entry for future competitors. As the chart shows, a challenger must be prepared to lose money for a pretty long time. And who's got the cash to do that, if you don't happen to have a generation business in your back pocket? If you saw what happened to BizzEnergy then you know the rest of the story.