Shale Gas 2008
When, not how much
Without getting too technical about it, which we can but thankfully won't, one basic most end-users don't understand in energy purchasing is that the when is more important in pricing than the how much:
A discotheque may use twice as much electricity running all those lights, as an office, but pays half the price. Supply and demand: Power is cheap at night, especially after sane people go to bed.
An ice cream factory uses half the amount that a bakery does, yet the bakery pays twice as much. The bakery's December ovens compete for gas with millions of domestic users, and they are switched off in the summer. The bakery rate includes lower summer gas, but at the freezers and mixers they pay only for summer gas.
A key rule of UK energy pricing for the long term contracts that everyone is used to, is that prices are based on a curve that follows domestic demand assumptions, in turn basically weather related. Prices change from day to day, but the shape of the curve remains essentially the same. So November should be higher than November, and January highest of all.
But not in the case of this season. Taking gas prices on day ahead November is now tracking at slightly less than the October outturn. And December is looking pretty good, especially considering that the prices reflect industrial shutdowns the second half of the month. January is when we normally expect to see reality intrude on wholesale markets anyway, so unless it snows from now until New Year's Eve, January may be lower still. We may see October as the more expensive month of the entire winter, which is historically real weird as us energy economists say.
Back in July, January gas was over 115 and today is 65 and falling. The difference between a one year fixed price of 90/95 that was offered most of the summer and the index cost has been over 40% so far. What would be worse: To be on an index and risk an outurn that is 40% worse than a fixed price or to be fixed and be guaranteed it?
Tories embrace smart meters
We don't flatter ourselves that the recent Tory conversion to smart metering is a sincere form of imitation. In fact it makes us more likely to think that if they like the idea there may be something horribly wrong that we've missed.
Struggling homeowners would have their fuel bills cut by hundreds of pounds under radical plans unveiled by the Tories.
David Cameron wants to make it illegal for energy companies to impose higher charges on customers with pre-payment meters.
Instead, they would have to install state-of- the-art 'smart meters' in every home. Experts say these meters encourage lower energy use because they show how much it is costing to leave the lights on or keep TVs, DVD players and other devices on standby. The Tories said it could save families as much as £300 a year.
Smart metering would among other things, remove the confusion marketing that energy marketing has degenerated into. Simple Time of Use tariffs would enable consumers to make decisions not on the essential irrelevance of who supplies energy, but on how much they use and can they save anything by either cutting use or timeshifting it. The cheapest kilowatt is the one you don't use.
Actually this may be a case of the Tories proposing something that the government is already considering, in order to later accuse them of stealing the idea. Either way, this news and the revelation from The Guardian re Ed Miliband recently that "Business leaders are telling us they can't remember the last time a secretary of state pissed off their lot so quickly," can only bode well.
On the subject of PPM meters and smart meters in general, it's worth noting that it in Northern Ireland Phoenix Natural Gas rates for standard tariff or Pay As You Go meters are virtually identical, and actually lower for small users. Since Phoenix rose from the ashes of what little mains gas industry Ulster ever had relatively recently, these costs reflect 21st century meter infrastructure, further confusing the issue of why do PAYG/PPM on mainland Britain carry such a premium?
Why the Green Gloom?
Disturbing, but not in the least surprising news from an FT poll:
About 30 per cent of Britons thought efforts to combat global warming would reduce the number of jobs available, compared with 24 per cent who said it would increase job numbers.
The British gloom will come as a disappointment to the UK government, which is preparing a “green industrial strategy” to boost manufacturing activity through focusing on environmental goods and services. Ministers have estimated that seeking to improve the country’s environmental performance, and generate 15 per cent of energy from renewables by 2020, would generate 160,000 new jobs.
We say that apart from the natural British (English) tendency to almost enjoy a disaster instead of expending energy on providing solutions, this is a result of simply not knowing too much about energy except the price is going up. The cheapest kilowatts are those that are not used, but since few business or domestic consumers have any idea of how much energy they use or what they pay for, highlighting areas for improvement is either difficult or just too much trouble: One example is how SME's have a lower switching rate than domestic customers. And as the Public Accounts committee highlighted last week, almost a third of those who do switch actually end up paying more!
There is a solution, but one which, until recently, the UK government has been not simply going slow on but actually obstructing: our old favourite Smart Metering, which would also allow the solution of index pricing. Both of these would make energy far more transparent than the current confusion which serves no one, although possibly suppliers have yet to be brought to that conclusion.
A crisis is a terrible thing to waste. We could just muddle through, but elsewhere, especially in the US, current events are seen as an opportunity to create, among other things, a wholesale decarbonising of the economy. We could muddle through. But the new paradigm of investment and spending, if it is not wasted can also give the UK hope for the future. Smart Metering, apart from making consumers aware can also solve a number of other problems:
Jobs: an accelerated SM program could create thousands of installer and meter manufacturing jobs
Fuel Poverty: SM will allow new thinking on energy pricing that will change the current mess where the poorest and those in fuel debt, sink deeper into a hole because the costs of prepay meters are inordinately high. This will naturally impact government targets on Child Poverty.
Carbon Reduction: Less Energy is less Carbon
Finally, lower energy costs will impact the wider economy. Energy is analogous to taxes in that everyone pays for both. Lower energy costs have an impact equal to lower taxes in the wider economy, but with the virtue of not being funded by government.
Does the public have the imagination to see this? Judging by the poll, not yet. But government can create some leadership that may yet achieve it.
When the Commons Public Accounts Committee entitles a report on regulation "Protecting Consumers?" Ofgem should be getting nervous. The question mark in the title shows for the second time this year that Parliament's patience with Ofgem's combination of excuses and inaction is wearing thin.
An important part of the displeasure is over the failure of the market. Ofgem has confused choice of supplier with competition for some years now. Ofgem's continual trumpeting of "Choice, Choice" made them sound like a throwback to Majorism at the best of times which was when prices were coming down. Energy prices declined for nothing to do with competition of course. Bad luck for Ofgem that prices are rising for nothing to do with competition either, but at a time when Reaganesque solutions appear ridiculous.
The Committee Chairman referred to a "confusopoly" which is a compound of monopoly and a complex pricing structure.
The Public Accounts Committee seems impatient with Ofgem's inablility, and seeming unwillingness, to act. The PAC noted, as we have, that a market where a quarter of electricity consumers actually switched to a more expensive rate is more a sign of confusion marketing than a reliable market.
They also recommended that suppliers are to offer the lowest rate to customers, a hard habit to break when there are a dozen or more tariffs per supplier on the average switching site.
High energy prices are unfortunate. Where they are made worse is deliberate confusion marketing strategies, lack of reliable volume or time of use data, third-party introducers with hidden agendas and all users being discriminated against by being denied access to wholesale prices that are readily available to larger users. Ofgem is being told to shape up, but is it too late?