Looming election fuels blogosphere chatter

With a General Election imminent there has been a sharp rise in internet chatter on energy – viz. the low wholesale price plus the  high level of domestic prices and the massive margins that companies are making.

The BBC has reported that dual-fuel customers of the big energy firms have missed big savings by not switching suppliers, early evidence from a competition inquiry suggests.

The Competition and Markets Authority (CMA) has been investigating the energy market since last summer. It says that from 2012 to 2014, more than 95% of dual-fuel customers of the big firms would have saved money by switching tariffs or suppliers.

Energy Minister Ed Davey said that if the competition authority eventually found any energy firms were abusing their market power, one course of action could be to split them up.

There has been at least one defendant of the status quo. David Porter, the ex head of the Association of Energy Producers, has released his new book ‘Electricity Supply: The British Experiment’ where he partly defends the status quo. The recent rise in energy bills (the book came out last year) and the perception of a greater risk of blackouts are central themes in the book.

Sadly it misses the point of the power of the oligopoly. While wholesale price of energy has slumped dramatically this year, household bills have not – begging the question why?

Simply put the market structure (an oligopoly of a handful of vertically integrated players) makes meaningful new entry virtually non-existent therefore domestic prices are kept unfeasibly high while wholesale prices are low resulting in healthy group profits.

For instance look at Iberdrola – its earnings (EBITDA) were 3.1% higher thanks to the performance in operations in the UK, US, Brazil and Mexico. However there was a 7.4% drop in its home market of Spain because lack of success in grappling with regulations. In contrast the UK figures were largely better because of the large margins in the combined generation and supply operations.

Energy economist Dieter Helm has just published a paper (Energy Futures Network Paper No. 7), addressing the issue and offering possible solutions. In it he says : “The CEGB would not have wasted billions on switching. It would have  passed through the benefits of the massive fall in coal costs over the last few years. It would have been reducing prices now. It is worth remembering that the average cost of coal and gas combined has sharply fallen, even when the generators were passing through the rising marginal cost of gas”.

He adds that the logical conclusion of the posturing by Prime Minister hopeful Ed Milliband could be full re-nationalisation too, since without competition ‘there is not much point in  paying a private sector cost of capital, when the state can borrow at much less’. 

This blogger has been going on and on about this subject for years (see January 2015 blog, August 2014 blog, July 2014 blog, June 2014 blog, may 2014 blog, ad nauseum then way back to “UK energy policy and the end of market fundamentalism” published by Oxford Energy and also “Electricity Competition is Bad for Your Pocket book”, University of Sussex). I could go on and on.

Could we see an electoral promise to change things? It’s certainly a vote winner.

Dominic Maclaine is an EPG Associate and used to be the editor of New Power before he sold the business. He conducted PhD research into electricity supply competition in the UK and Norway at SPRU. He was previously the editor of the monthly newsletter Power UK published by Platts (and previously the Financial Times). He is currently writing a book about recent developments in the UK electricity market, to be published by Routledge.

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