From No Hot Air

Nov 13, 2009
An Independent view on Ofgem and prices
Leading article in today's Independent newspaper makes our view of Ofgem appear charitable. We almost feel sorry for them. Almost, but not quite.
Such profiteering is little short of scandalous. And yet Ofgem, the most useless of the government's regulators, has done almost nothing about it. Instead it parrots industry PR about how since privatisation two decades ago prices have fallen in real terms and customers' bills have been reduced by £1bn per year. The truth is that privatisation has been a failure because public monopoly has been replaced only by private oligopoly. The number of suppliers has fallen from more than 20 in the late 1990s to six dominant conglomerates today. Bodies that big, and that few, do not need to collude; they have a confluence of interest which creates market failure. Their 4,000 different tariffs renders meaningful comparison – and therefore true competition – impossible.The job of Ofgem should be to ensure that retail prices in the industry track international energy prices. To that end it must enforce greater transparency on the industry about how prices are calculated so consumers can tell whether they are being offered value for money set against the international market price. Instead, it seems to accept industry blandishments without question. It needs massive and immediate reform.
Posted at 11:33 AM in Prices and Politics Permalink Comments (0) TrackBack (0)
Gas Glut and prices
November has seen prices collapse. This is the 13 month curve in just the past two weeks. One key lesson here is how depending on the curve for price prediction is rather foolish. December 09 is now the cheapest month. If the market depends on supply and demand for prices, why should the lowest demand month of July be lower than the second highest demand month of December?
The quick answer is that curve prices are not very liquid, that is that there aren't a lot of buyers and sellers. Liquidity cascades from Within Day to Day Ahead, Month Ahead, M+1 etc to the point where prices for two years or so away are effectively not traded - in other word the market simply guesses.
This shows the ultimate pointlessness of buying on Fixed Terms, and larger end-users increasingly don't bother.
But what about those who don't have a choice? Floating Prices are not available from most suppliers for most size of end-user. Smaller users are forced to take prices made on guess work, and that includes domestic users. The rationale where December next year should be 72% higher than this year shows the insanity here. Even assuming some recovery of UK demand due to a recovery that may or may not show up, that month and winter 2010/11 seems divorced from any possible reality.
But SME's have another issue. They are often advised by energy brokers who have a vested interest in scaring them into shortage scenarios, and not only the press, but Ofgem enable them in this. What value is "security" of a fixed price when the default option of pricing against day ahead or month ahead indices provides much lower prices? The reality is that end-users aren't told about the difference between fixed and index prices since it is not in consultants interest to tell them.December 09 dropped another .05 while we were writing this.

Posted at 10:27 AM in Energy Prices Permalink Comments (0) TrackBack (0)
Nov 12, 2009
No surprise
From PA:
British Gas parent Centrica has said its residential utility arm was on track to see profits soar by an expected 43% this year, despite a 7% fall in energy consumption.
Seven per cent drop in sales, 43% increase in profits. Why can't the rest of UK industry do this well? Probably because they don't have an as blind, toothless and incredibly naive regulator as Ofgem.
Ofgem believes, solely because the Big Six told them so, that they simultaneously had the misfortune (ours, not theirs evidently) to buy July, August and September 2009 gas during the highest prices ever recorded in July 2008. Ofgem has resisted calls to have an open book investigation of suppliers on the grounds of commercial confidence.
Unless the Big Six are complete morons, they would have contracted for that gas at the time, with the price set at the prices in effect on the wholesale markets at the time of delivery. They would have perhaps bought an option to buy the gas at that price, or any number of derivatives to protect themselves but they probably didn't bother. This was the time of $143 oil, and everyone knew which way that was going.
Wholesale prices today are up to 70% lower than they were last year. And that is the price that the big six are paying, which explains how they increase profits even as sales decrease. Ofgem is naive on the verge of incompetence if they believe, with no proof, that suppliers bought into iron clad agreements last year.
Utility bills are as unavoidable as taxes. Utilities are essential a tax for modern life. And they have a similar impact as taxes. If they are higher than they could or should be, they have a macro economic impact that should take precedence over the narrow interests of Big Six shareholders. Better economists than I can say what the £50 a month that the average user over pays would be equivalent to: It would surely be equivalent to a point or two on income tax or VAT. Energy bills are an incredible downward drag on consumption and may explain why the UK is doing worse than other economies. I don't believe this is deliberate, as it imputes competence they don't have , but the net impact of Ofgem sabotages the recovery. That £50 a month could be going from energy payers, which is just about everyone who also pays taxes (and those who don't like the unemployed and pensioners) into retailer tills, or paying down debt or even investing in companies like Centrica.But we can do something about those who raise taxes. We can't do anything about energy bills, because Alistair Buchanan says that British Gas's prices are just fine with him. The Tories are allegedly planning to ditch Ofgem.
What"s the betting that Alistair Buchanan ends up on one of the boards of the Big Six sometime in the future?
Posted at 09:16 AM in Current Affairs, Energy Prices, Prices and Politics Permalink Comments (0) TrackBack (0)
Nov 11, 2009