A couple of weeks ago, I started out writing a piece on the wholesale energy markets in the UK and ended up writing a bit of a polemic on governmental and regulatory myopia when it comes to what ails the energy markets. Given that the piece was supposed to be informative rather than opinion based we edited viciously and the polemic ended up on the cutting room floor. In light of the recent announcement by OFGEM regarding the proposals to enforce forward market access for external small supplier counter parties to the big six’s in-house generation book I would like to apologise to all those unfairly maligned in some of the opinions in the blog that never was; and then apologise again for reintroducing about 80% of said blog into this one.
Let us start firstly with OFGEM’s proposals; which are laudable and a step in the right direction; but they are merely the first step of the journey, not the journey itself. In simple terms OFGEM’s proposals will, if they are enacted as proposed, have the effect of enabling the smaller suppliers such as First Utility, Flow Energy, iSupply, Utilita, LoCo2, Co-op energy and Spark amongst others to access market prices up to two years in the future. This will enhance their ability to manage future price volatility, the market exposure of their margins and the origination of products – especially Fixed Price products.
The devil of course is in the detail. Forcing someone to give you access to a product doesn’t mean they will give it to you at a competitive energy market price. In an effort to improve liquidity in the trading market OFGEM are effectively asking the Big 6 to publish and execute against their internal transfer price; ie the price at which the generation division sells power to the supply division (the crowd that bill you.) If you are on the board of the big six do you expose your generation division to artificial competitive pressure or do you ensure that generation margins remain healthy by keeping the internal transfer price, and hence the published price, high? How far into the costs of generation are OFGEM willing to stick their nose? As it is some of the meddling by government and regulators in the carbon allowance and renewables subsidy parts of the market are delivering very tidy sums to individual generation units. Where is the price transparency there?
Given the fact that the supply market outside the Big Six constitutes about 2% of domestic supply; their ability to exert pressure through this supposedly tradable market doesn’t really exist. As OPEC can tell you, you don’t need 98% of the market to operate a cartel. That is not to say that a cartel is what exists; but what does exist is a situation where the big six buyers of electricity do not compete with each other to purchase the electricity of a pile of generators who in turn compete with each other to sell their product. If you want proof of the flaws in the model then you need look no further than Haven Power, the Industrial and Commercial supplier set up by Drax Power to enable them to have a vertically integrated model too! So OFGEM are forcing the Big Six to sell to everyone (hello credit risk Mr Big 6); and this will undoubtedly help the non- vertically integrated suppliers gain access to risk tools (forward prices); but the price they may need to pay for these will still leave them without the security blanket of the potentially large generation margins that can help support/cross subsidise a vertically integrated player. Thus the status quo remains unchanged.
Lifting the veil on how the energy markets work is important so that as many people in the general public as possible understand the industry because perhaps then we will start to shift the lethargy monster. People need to move to the smaller, newer suppliers to introduce liquidity into the retail market and a genuine fear of lost market share amongst the big 6. They will respond in one of two ways: batten down the hatches and try to weather the storm hoping it is a fad; or begin to innovate and change in order to retain their pre-eminence. We know that consumer power in the end will strengthen the latter and destroy the former; all in our favour.
Meanwhile the government can’t simply sit by and ignore the implications of the vertically integrated nature of the big six. Nor can they hide behind the big six, using them as a convenient whipping boy and then simultaneously use them as cover for social and environmental engineering projects. If they want a renewable future then they should be explicit in how much it is going to cost and not try to muddy the waters by lumping it all in with rising commodity costs, supplier profits, and generation subsidies. They also need to grasp the nettle and decide to provide the necessary environment for investment to drive the right type of generation.
Similarly, if we as the community of the United Kingdom decide to support the fuel poor and those on the margins by providing them with warm home discount subsidies, free insulation and the like (and we believe that we should), then we should pay it out of general taxation. Forcing suppliers with more than 250,000 meters on their books to start paying for this type of social expenditure will always mean that no small supplier wants to breach the threshold; which in turn means no-one gets to the scale necessary to challenge the dominance of the big six. It is somewhat ironic that we deploy some of the most vilified names in UK business to deliver some pretty big wealth redistribution initiatives. Sadly this is just symptomatic of the myopic “Big Six focused yet not dealt with” thinking that would appear to be the principle focus of interventions. So in parting please remember these names and give them your support as that will be the fastest way you can help the UK achieve some level of balance in its energy supply market: Co-operative Energy, Daligas, Ecotricity, Flow Energy, First Utility, Good Energy, Green Energy, isupply, LoCo2, Ovo, Spark Energy and Utilita. The small guy deserves your support.