[DaveO]

Re: Gas Gas Gas : Tue Oct 29, 2013 4:52 pm  

El Barbudo wrote:

I can't a cartel being provable as it's most likely not a classic cartel where they agree amongst themselves what price to rig at.
Rather it's that they are happy to copy each other and put prices up way more than cost rises.

What is the regulator doing about all this?

Well the CEO of OVO energy a small provider for the Bristol area says naff all.

One MP made the point I did above about if we all went renewable they would be stuffed as businesses.

Lots of stating the obvious from MP's. Lots of obvious replies from the energy companies.

I can see the only thing to come out of this will be the removal of the green levy which will give us £60 off our bills for a year before the next price increase wipes it out.

Still Cameron will have been able to say he delivered on a promise despite the fact removing the funding for the green levy would put a stop to the installation of free cavity wall insulation and boiler replacement programs etc for the least well off thus no longer reducing their bills long term.

Re: Gas Gas Gas : Wed Oct 30, 2013 9:59 am  

On this morning's BBC there was a clip of one energy boss saying that if he couldn't charge a certain %age, he couldn't pay staff etc etc.
It sounded to me like a deliberate confusion of which variable costs were actually varying.

i.e. The retail energy companies' costs are not limited to the price of the raw material, they have to pay staff, the cost of delivery of the energy, billing, etc etc.
When the raw material price goes up by, say, 5%, and the rest of their costs remain pretty much static, that's only a higher cost for that element of the product, not a higher cost for all the other elements of the product ... and therefore doesn't mean the final selling price has to even go up by 5%, never mind 10%.

[DaveO]

Re: Gas Gas Gas : Wed Oct 30, 2013 10:34 am  

El Barbudo wrote:

i.e. The retail energy companies' costs are not limited to the price of the raw material, they have to pay staff, the cost of delivery of the energy, billing, etc etc.
When the raw material price goes up by, say, 5%, and the rest of their costs remain pretty much static, that's only a higher cost for that element of the product, not a higher cost for all the other elements of the product ... and therefore doesn't mean the final selling price has to even go up by 5%, never mind 10%.

It is worse than that. These companies act as generators and suppliers (for electricity not gas) and their own figures say they make a profit on generation of between 17% and 23%.

However they don't consider the generation and retail side of their operations part of the same business so all the crying about not being able to pay staff is due to the fact they ignore how much money they make from generation.

They run them as separate businesses and so if the retail side can only buy electricity from the market at whatever is the going rate and that means to maintain profits they must charge what they do, they see that as simply the fact of the matter and nothing can be done about it.

This is what Milliband wants to change. Whenever his freeze on energy prices is mentioned in the press it is very rare you see mentioned the reason he wants a freeze is so he can reform the markets.

The call from the energy companies for the Competition Commission to get involved is a smoke screen as that would not consider if the markets are working, just if within the markets as they are whether there is competition and not price fixing or whatever.

Milliband's idea is not to have an inquiry for two years but to actually get on and change things. It makes DC's non-existent solution of removing the green levy look really pathetic but of course the press being mostly right wing as I said rarely mentions that the price freeze is there to allow the markets to be reformed.

Re: Gas Gas Gas : Wed Oct 30, 2013 1:05 pm  

DaveO wrote:

They run them as separate businesses and so if the retail side can only buy electricity from the market at whatever is the going rate and that means to maintain profits they must charge what they do, they see that as simply the fact of the matter and nothing can be done about it.

This is the key point, the retail and wholesale operations are separate, so the retail operation must pay at the market rate regradless of who the wholesale supplier is. The profit margins of the retail operations are not particularly high, about 5%, less than what most people will pay on other retail services they consume.

So what to do about this? That's much harder.

Forcing them to operate as integrated units in itself doesn't help and it risks greater monopoly/oligopoly power for those who have both retail and wholesale operations. The energy market is basically an international market for commodities and the UK is not self-sufficient (maybe with fracking we could push that way) so the wholesale costs don't magically change by trying to force wholesale and retail together.

Having a state monopoly doesn't really help anything for the same reasons, it just doesn't address the wholesale cost as we have to buy it in, all you can do is try to cross subsidise through taxation, which economically just makes it a question of tax incidence (it doesn't fundamentally change anything but it might allow some people to dellude themselves into feeling better about it). Looking to bring substitute energy supplies on stream is only worthwile if they are actually going to cost less than buying from the existing market, so chucking money at renewables/coal/nuclear/fracking/other only makes sense if the fundamental unit costs are going to be lower or we're just back round to subsidies and tax incidence. And finally the deadweight costs of a state monopoly are not actually needed to operate subsidies (if they are actually allowed under EU law), so state monopolies don't really bring anything to the party beyond any incidental statist ambitions people are bringing along for the ride.

So I think we're down to what people really want, but cannot have, and that is for the wholesale market to cross subsidise the retail market by suppling to UK retail at below market prices. But that is cloud cuckoo land because if we don't want to pay the wholesale market price the suppliers will simply sell it to someone else.

Re: Gas Gas Gas : Wed Oct 30, 2013 1:08 pm  

Kelvin's Ferret wrote:

... the retail and wholesale operations are separate ...

That's the theory. The point is that it is not the reality. As pointed out in the recent Which? investigation.

Re: Gas Gas Gas : Wed Oct 30, 2013 1:31 pm  

Kelvin's Ferret wrote:

...And finally the deadweight costs of a state monopoly are not actually needed to operate subsidies (if they are actually allowed under EU law), so state monopolies don't really bring anything to the party beyond any incidental statist ambitions people are bringing along for the ride...

If energy suppliers are failing to compete (as it appears generally) then they are operating in the same frame as would a monopoly and they are bringing nothing to the party ... so it might as well be state-run, if only to save the profits for the consumer.
Plus, as DaveO has pointed out, generators' and suppliers' (for electricity not gas) own figures say they make a profit on generation of between 17% and 23%.
So, for electricty at least, bills could be a whole heap cheaper.

Plus, as I mentioned before, a set 5% profit margin might look low but as the wholesale cost of energy rises, the retail price is rising by more.

If I buy socks at 50p and sell them for a pound and then, due a global sock shortage, the wholesale price goes up to 60p ... I only need to increase my selling price to £1.10 to make exactly the same profit. (The energy retailers are not doing this).
If I increased the selling price at the same percentage rate that my sock costs have risen by, I'd charge £1.20. (The energy retailers are telling us it's right to do this .... and then some more !).

Re: Gas Gas Gas : Wed Oct 30, 2013 2:37 pm  

El Barbudo wrote:

Plus, as DaveO has pointed out, generators' and suppliers' (for electricity not gas) own figures say they make a profit on generation of between 17% and 23%.
So, for electricty at least, bills could be a whole heap cheaper.

What we really need to know is what % of the consumer bill equates to generation costs, then we'll know how much profit that really equates to. Some Ofgen figures on the BBC put overall wholesale costs as 46% of the consumer bill (dual fuel). So what we need to know is what % of the wholesale cost is generation, and then we can make some assumptions about how much the profit on generation equates to in consumer bill terms. So effectively it will be a % profit on a % generation cost of the 46% overall wholesale cost.

Also, on whether competition is working, another graph on the BBC suggests that our retail energy bills are amongst the lowest in Europe, second lowest in EU 15, which makes me think talk about competition not working in the UK is really a red herring. The problem is more fundamental and relates to global supply and demand of energy, and talk of nationalising or doing expensive competition investigations is simply about creating the illusion of activity without dealing with the really hard problems.

Re: Gas Gas Gas : Wed Oct 30, 2013 2:53 pm  

Kelvin's Ferret wrote:

... another graph on the BBC suggests that our retail energy bills are amongst the lowest in Europe, second lowest in EU 15 ... without dealing with the really hard problems.

You have a point here, in that a massive part of the problem on fuel bills is that cost of living as a whole in the UK is so high – housing being a particular case, but not the only one. With wages having been driven down over the last 30 years, while the cost of living has risen hugely, the issue is not simply the cost of fuel bills, but the cost of living as a whole.

And when companies ratchet up their bills by vast, way-above-official-inflation amounts, people will see it and feel it particularly keenly.

So ultimately the points that need to be tackled are related to the rising cost of living and falling levels of income.

Re: Gas Gas Gas : Wed Oct 30, 2013 3:04 pm  

...of course in the days when power stations were coal fired and UK PLC owned all of the coal mines, and owned all of the rail network to transport the coal, and owned all of the power stations to generate the electricity, and owned all of the grid to distribute the electricity, and owned all of the gas fields or coal gas producers, and owned all of the network of gas distrubution...

...then any such costs were just overheads and profit was not a primary motivator in distributing energy.

[DaveO]

Re: Gas Gas Gas : Wed Oct 30, 2013 3:18 pm  

Kelvin's Ferret wrote:

What we really need to know is what % of the consumer bill equates to generation costs, then we'll know how much profit that really equates to. Some Ofgen figures on the BBC put overall wholesale costs as 46% of the consumer bill (dual fuel). So what we need to know is what % of the wholesale cost is generation, and then we can make some assumptions about how much the profit on generation equates to in consumer bill terms. So effectively it will be a % profit on a % generation cost of the 46% overall wholesale cost.

Also, on whether competition is working, another graph on the BBC suggests that our retail energy bills are amongst the lowest in Europe, second lowest in EU 15, which makes me think talk about competition not working in the UK is really a red herring.

It doesn't follow that the reason for this is competition in the UK. Other countries bills could be higher for any number of reasons.

However the important point is it does't matter if we do have some of the lowest energy bills. What does matter is if this competition we supposedly have has driven the costs down to the lowest they can be in absolute terms, not whether they are the lowest compared to others and this is obviously not the case.

After all that was the promise of privatisation.

Whatever competition there is has resulted in the problem El B mentioned, of price increases being passed on at the same % as the wholesale price increases thus inflating profit. The fact we may still have cheaper energy than others when the generators are making 17%-23% profit also means our retail cost is too high.

The problem is more fundamental and relates to global supply and demand of energy, and talk of nationalising or doing expensive competition investigations is simply about creating the illusion of activity without dealing with the really hard problems.

The problems of supply need to be dealt with but talk of nationalisation is certainly not giving an illusion to anything as it would theoretically reduce bills by a certain percentage permanently unlike removing the green levy which would have an effect for 12 months at most. Now that really is an illusion.