Shale Gas 2008
Who could have knowed that this winter's gas and power prices were set to collapse along with everything else?
Quite a few people actually predicted of course that oil and energy prices were starting to push people to the wall or over the edge way before oil hit $147. We highlighted the impact of energy on consumer behaviour almost from the first post. And while we never were foolish enough to give numbers, we said that the number the market was giving about winter gas prices at £1 a therm was way over the top.
The crisis has accelerated the rush downhill of prices, but they were headed that way anyway. Sadly, the insurance buyers, those who buy fixed price power and gas will simply say that the collapse in prices was just as predictable as 2% interest rates, nationalised banks 45% drop in the Dow etc etc. In a perverse way they will think themselves proved right and that they were actually prudent in fixing prices and the crisis should be viewed as being a type of force majeure.
And some people still cling to the old ways
Consumers who were expecting significant falls in their energy bills over the next few years – which have risen by more than 40 per cent in 2008 – could be disappointed, Alistair Buchanan, the chief executive of Ofgem, told an influential group of MPs
Peter Luff, the Conservative chair of the Committee said afterwards: "This has to hit consumers. It has to. They will be puzzled to see oil prices tumbling and no reduction in their gas bills, but the forward gas market remains ahead [of the current price] throughout 2010 and 2011."
Most gas companies buy their energy on the 'forward market', which allows them to purchase contracts at a set price in the future.
According to energy consultants ICIS Heren, the price of wholesale gas in summer 2009 is 49.87p, but rises to 53.5p in summer 2010 and to 55.p in 2011.
Someone is missing something here, and it ain't us. First off gas companies are as likely to buy their gas on the forward market for physical delivery as any one in any other commodity: i.e. not very likely at all. Like any commodity, it's all about paper and derivatives, not actual molecules or electrons.
Secondly to wring your hands today about gas prices next year is mad, for 2010 is insane and to do so for 2011 one would have to be clinically barking. This is the same "efficiently operating market" that said summer 2010 would be 34 (June 2007) 42 (December 5 2007) 57 (April 2, 2008) 71 (May 15) 77 (3 June) and 86 (16 July). Why would anyone care about next year's gas? There's no gas shortage, the UK will find plenty of people who want to supply it at the time, just as there will be ample supplies of oil, gold, wheat and pork bellies.
It will be what it will be. For SME users all gas and power derives from wholesale markets that are worried about today and tomorrow and maybe all the way to January. Traders make plenty from that. They know that next year's price is based on next year's news. But with end users lining up to be shorn like sheep, who can blame them for holding the shears?
Invest if you have it. Or invest because you have to.
As we all peer further into the abyss, some are closer than others. Those heading south with locked in prices are closer than others. They will shortly be paying double what their competition is for energy. Did they make the right decision?
No and Yes.
No, because anyone should have seen that prices for oil, gas and electricity were completely unsustainable and had been entirely divorced from reality for some time. But for those who buy fear instead of energy, it's always easy to see some scary disaster story out there which means they take out the insurance policy of fixed energy prices. But the definition of scary, risky surprises is that they are unknowable. Who would have predicted 2% interest rates in June, nationalised banks, and a renewed interest in joining the Euro? It comes down to what premium you attach to security.
Lots of fixed price guys will be paying nothing for energy by next spring at this rate. They'll be in administration and the lights will have been turned out.
But a high energy price still provides an incentive to invest long term. Sure some people were mad enough to sign up three year fixed prices. But spend that money now, on efficiency or renewables and there won't be any money spent, or wasted, on energy in the future. Assuming you have any money left, this is the time to spend, spend, spend.
Pay as you go
What is the attraction of paying by direct debit? Customers sometimes automatically ask for it, but that is because there is often a supplier or TPI whispering something in the ear about risk, set monthly costs, stability etc, etc.
One reason people use DD's is that they aren't given an alternative such as floating prices combined with smart metering. Utility metering has yet to reach most parts of the twentieth century let alone this one and most people seem to think no monthly billing is as British as driving on the left. Which is bizarre considering that every piece of information most of us ever wanted, and quite a few pieces we wish we could lose, is now digitised and stored somewhere for ever. Apart from your gas bill. Nanotubes? Battlefield robots? Interstellar travel? Time Travel? Computers that think? Some is science fiction, but the pretty sad science fact for most of us is that a monthly gas bill is as unattainable as a vacation to Alpha Centauri.
This is a sad story, from the paper that is so unrelentingly dismal in it's usual outlook that its a wonder most of the readership hasn't topped themselves, is even sadder from being true. We speak of the Daily Mail of course:
Shaun and Julie Lock, who run a post office and village store in Mawgan, Cornwall, signed up with E4B because the company claimed to offer cheap electricity. Four months into their contract, the couple discovered they were being overcharged on their direct debit to the tune of £200 a month.
When they complained, they were assured that it would ‘all work out OK at the end of the year’. Weeks later, E4B went into administration, owing the Locks £2,500 they can ill afford to lose.
Mrs Lock, 43, said: ‘It’s a huge burden for a small business like ours. In future we will pay each gas bill as it comes. Direct debit? Never again.’
Four months of the year, a DD pays for the utilities actually used. Business people have to decide if they want to spend four of the other months giving an international energy company an interest free loan, or whether the business is so hard up that it needs to borrow at an exorbitant rate simply to keep the lights on.
Ofgem Energy Probe
Friday afternoon is the traditional time to bury news you'd like others to ignore, miss out on or just plain forget ever existed.
Ofgem released this afternoon two pretty damning reports on both SME and domestic end user engagements with the energy market that Ofgem's Energy Probe already essentially cleared in early October.
As a rule, Ofgem would issue any supporting research and the report itself simultaneously. Not when the reports (which Ofgem commissioned) show results completely at odds with Ofgem's usual rosy picture of how great the UK energy market is. This time around Ofgem was wavering slightly, probably due to sustained public criticism from energywatch and the Parliamentary Business Affairs Committee and Public Accounts Committee. We assume that Ofgem is also feeling the heat from any MP of any party on literally thousands of complaints over either price or service or both on energy suppliers.
But now we see why: Ofgem's own reports show a complete breakdown of energy markets:
Few are both willing and able to seek out better deals proactively. Some who attempt to do so
struggle to compare prices easily on price comparison sites. Price comparison may also be
complicated by issues such as length of contracts
Business customers were at best fairly satisfied with their energy supplier and often
disappointed. They felt that energy companies deliver, at best, moderate standards of service
with no attempt to offer value-added services
This study suggests tighter regulation of TPIs and energy companies may be desirable.
The competitive energy market does not appear to have resulted in:-
companies seeking to deliver high levels of service
small businesses comparing prices easily, and being confident that they are comparing on a
like for like basis
A few days after interviewing was completed the British Chamber of Commerce issued a report
claiming that energy suppliers were not giving businesses the same “fair and transparent”
service as that received by domestic users.
BCC argued that, compared to domestic users, businesses were “significantly more vulnerable”
to exploitation and unfair practice, partly because
domestic suppliers are required to publish their tariffs but there is no regulatory requirement
covering business suppliers
domestic contracts allow people to switch every 28 days, but businesses have to sign up to
David Frost, director general of the BCC said:-
“with the economy slowing and energy bills on the rise it is totally unacceptable that
hard-pressed businesses are left so open to exploitation by energy suppliers.”
This study provides strong evidence in support of BCC‟s arguments.
Why didn't Ofgem release this research at the same time as the probe itself? Probably because the research would seem to contradict the conclusions.