Energy Arithmetic – Maths like no other
It would appear that, tired of being fed on the pretty unappetising gruel that is the remorselessly rising energy prices, the House of Commons has decided to bark. This is despite having a conveniently handy dog in the form of OFGEM which is supposed to do the barking on their behalf. With John Robertson (MP)’s universal presence on the BBC’s airwaves this morning it is not difficult to read into this change of tack a fairly strong rebuke to OFGEM for perceived inadequacy. The all party group of MP’s has a very valid point; namely that regulating prices in the residential markets is all fine and well but if you cannot ensure competition and transparency earlier in the supply chain then you may as well be deploying a chocolate fireguard on behalf of consumers. The maths here is pretty simple when deconstructed and it runs as follows:
The MP’s are pointing out, quite rightly, that whilst we spend all our time analysing the items in orange, namely supplier margins and gas prices – the elephants in the room; and yes there are more than one – are Generator Margins and Green Agenda costs. This is not to pooh-pooh the relevance of the others, especially gas prices; but they should not be used as a fig leaf for these key areas which need further interrogation. The first of these, Generator Margin, is the responsibility of OFGEM who need to ensure that the current asset allocation represents fair value in a regulated market. To determine fair value one needs to look at the age of plant, the capital costs of plant, the fuel used, regulatory costs and the subsidies and incentives received by that plant. Does EDF, as a French government business, receive an unfair advantage by virtue of its parent company having its original capital assets “gifted” to it by the French state? A variation of that question, focusing on other inbuilt advantages, could be applied to all of the big six. Does OFGEM have an obligation to ensure that in enabling the government’s carbon and climate change agenda it doesn’t inadvertently oversee the huge disbursement of funds from hard pressed users to six very large corporate businesses that would have made their generation investments in any event as part of a wider business resilience programme? The paradox could be simplified by positing the following statement: Are the big six the energy suppliers the equivalent of rich pensioners being in receipt of the winter fuel allowance!
Now it could be that at every step along the supply chain all processes are optimised, and all margins constrained, by the presence of strong competition in the market. The reality is that we simply don’t know because transparency at the level needed does not exist. You can switch energy supplier between up to 18 suppliers; but dig deeper and you will find that the likelihood of you having switched underlying generator is far less likely. This makes the fact that new energy suppliers are able to supply cheaper than the big six much of the time even more interesting. (Is this what efficiency looks like?). If you make all your money from generating electricity then why would you care who owns the ultimate customer, why be Tesco retail when your distribution centres are selling wholesale to Sainsbury Retail so that they can undercut your own retail division? The answer is in the fact that intense competition at the residential level; with the emergence of one or many sizeable players, would put generator margins under threat. This new player, Lidl to keep up the supermarket analogy – could start to play generation assets off against each other and more importantly; such a large player would be able to make the capital investments necessary to enter the generation market themselves. All consumers who do not switch energy supplier are not only playing into the apathy strategy of the big six suppliers, but they are also helping to keep the status quo the same.
The whole issue is horribly muddied by the fact that Feed in Tariffs, Renewables Obligations, Renewable Heat Incentives, Warm Front Schemes, Energy Company Obligations and others are costs that are significant and growing but are not specified anywhere on the bills. This might be because no government wants the consumer to understand how much of the costs are actually taxation – a similar problem to the fuel at the pump argument. Thus the blame can be conveniently laid at the door of the suppliers; as if they don’t already have a big enough public relations challenge! The trouble is that giving information at this level of granularity makes the bill more complex and OFGEM has been on a crusade of simplifying bills, tariffs and indeed everything to do with energy. The risk we are running now is that if you simplify everything you end up with lowest common denominator solutions. The MP’s have spoken and in a relatively coherent manner; so switch energy supplier as your own short term contribution to the on-going debate; but I feel this story will run and run.
Guy Thompson, Director, Energy Expert at www.myutilitygenius.co.uk