The tethered goat and the Energy Bill

Will history look back on the launch of MyUtilityGenius and conclude that we started just as OFGEM, or David Cameron, or both, provided the silver bullet that slew the energy profit monsters?  It seems unlikely as what we have heard over the last few weeks is a lot of hot air and opinion but not much by way of proper analysis and understanding.  Perhaps it’s time to look at the facts?
Let’s start with the baddie, always the most interesting character in any drama.

So just how bad are the big six; and is their badness a nature or nurture problem?  The average household energy bill in the UK is approximately £1,300 (depending on the tariff you’re on and the amount of energy you consume).  The estimates on the big six’s margins vary but it’s around £45 for the average household. Taking account of VAT at 5% we arrive at an energy bill pre VAT of £1,238.   So that £45 translates into a margin of just 3.6%.   That is hardly the stuff of Bernie Madhoff.   If we knocked that £45 off every consumer’s bill energy prices would still need to rise by 8-10% increments.

So how do you ameliorate the pain?

The clarion call to renationalise the energy companies is really a call to get taxpayers to foot the rising price of energy bills, rather than have the consumers of energy pay for  it themselves. At which point, whatever minor progress we have managed to achieve in persuading people to “consume less energy” goes out the window as the consumers of energy are effectively subsidised by the taxpayer. The Spanish have subsidised energy for years and based on this experience I believe we would risk running up a budget deficit on energy of €24billion.   And Spain is hardly a country we want to copy: cheap energy but no jobs, no public services and riots on the streets of Madrid.

So am I saying that the big six are actually an unjustly maligned group of do-gooding companies beset at every turn by the unjust criticisms of vested interest groups?

Well, not quite – but the problems we should have with them stem not from any avaricious profiteering nature they may have.   The big 6 are the companies they are today as result of the appalling nurturing process of governments, the markets and the regulators. .

Back in 2001 there were 21 electricity supply companies in the UK vying for customers; the UK had an over capacity of generation assets and prices were tanking under competitive pressure.

The big six, as we know them today, did not exist. Then in the space of 24 months Independent Energy went bust, Enron happened, the American utilities fled the market and wholesale prices (and some poor trading positions) took Texas Utilities (who had bought Eastern Energy) to the wall just as Nuclear Electric (who became  British Energy following rebranding) found itself selling electricity at an operating loss of £16/MWh. Simultaneously British Gas entered the electricity retailing fray extremely aggressively and the old Regional Electricity Companys (REC’s) cried foul and sought to protect themselves from the old monopoly company.

Meanwhile nobody (other than the suppliers) wanted to buy generating asset from the principle players (still Powergen, Nuclear Electric and National Power at that stage). Somewhere, somehow a decision was made that these assets needed to be sold to finish the privatisation job (and the REC’s deserved some protection from the entry of BG.  The rules governing who could buy what were then relaxed to allow retailers (we now call them suppliers) to buy generators and generation assetsand for generators to buy suppliers.

In quick succession National Power purchased a few suppliers, picked up Independent Energy’s customer base and rebranded themselves npower (to be bought by the German RWE group); Powergen had purchased a few more retailers including the remnants of the TXU group (to be bought in turn by German utility Eon). Scottish Hydro & Southern Energy merged and bought Swalec after Swalec had a brief dalliance with British Energy. London Electricity, SEEBOARD and SWEB merged (to be subsequently bought by EDF)British Gas began their foray into electricity with the acquisition of Enron Direct whilst everyone else merged, or sold themselves. The final nail into the coffin of separate supply and generation was hammered home when EDF bought British Energy (ex Nuclear electric) with BG taking a 25% stake in the business.

This is the equivalent of thinking that we have far too many dairy farms and, when no one shows an interest in buying these surplus assets, we go ahead and decide that it would be a great idea to sell the national dairy stock to Tesco, Sainsbury’s, ASDA and Morrisons. And then we wonder why other independent retailers of milk (corner shops etc.) can’t get their hands on any unless they pay through the nose – to their bigger, better financed competition.

You cannot blame the energy companies for trying to vertically integrate their supply chain (they simply followed sound business instincts).   But how could the regulator let this level of vertical integration happen, or in the case of the generation asset market, actively preside over a fire sale of the UK’s generation fleet at exactly the same time as North Sea gas began to run out?

If the big six don’t have to buy from anyone else, just undertake an internal transaction between their retail division and their generation division, then those prices don’t inform the market and are not subject to competition and proper market forces.  It is here that you get monopolistic behaviour. However, given that the problem was created by regulation or the lack or lax application thereof; it is a bit hypocritical for politicians and the regulators to be pointing fingers.  If you’re responsible for creating the rules of the game; and you create, through incompetence or ignorance, iniquitous rules that favour one side over the other, don’t be surprised if the favoured side plays by the rules and exploits them as much as they can.

So we should be feeling sorry for the big six then? No; they take full advantage of unfair playing conditions and a weak referee. You can argue that this problem is the result of incompetence or bureaucracy – a classic case of the left hand not knowing what the right hand is doing. But it’s more likely that when faced with a choice – simplicity, standardisation and transparency; or complexity, non-standardisation and opacity, the suppliers plumped for the latter.

In the domestic market there appears to be an inbuilt reliance on consumer apathy to ensure that companies make a profit.

In a competitive market you would expect to see vigorous testing of the efficacy of systems and bureaucracies, new innovations and the challenging of conventional wisdom, but instead we see no change. There is no need to be a lean, mean, aggressive, agile predator when the prey (customers in this analogy), sit apathetically in the middle of a clearing tethered to the standard price like a sacrificial goat! Suppliers cannot be blamed for the system but they are benefitting from the consumer being dazed and confused and don’t appear to have put steps in place to improve things.

Running a switching site you get to see the bigger picture; discounts that are impossible to fathom and consumption dependent; tariffs that are sent around in PDF format when everyone needs the raw data; no standardised tariff formats despite the fact that almost every tariff is simply a variant on another one; tariff names that don’t change but simply have version control – but a version control that doesn’t extend to customers so they need to remember which month in 2011 they signed up to the deal; discounts that are contingent on all manner of variables; calculations based on estimates that are so far off beam it beggars belief; payment methods which are opaque; and a general reluctance to disturb the status quo because the status quo works so well for the suppliers.

Where do the Government, the regulator and the media stand in all this?

Mainly, they stand on the side lines hurling abuse at the CEOs of energy companies. If you’re a big six supplier; you’re damned if you do and damned if you don’t – which probably explains their inherent cynicism and reluctance to change.   If you’re going to be blamed anyway, then why not see what you can get away with as that will give you some compensation for the battered reputation? The Government (this and their predecessors), probably find the big six  really convenient fall guys for the complete shambles that has masqueraded as an energy policy in this country for at least the last 10 years. Energy is a difficult subject and it seems as though no one in authority can be bothered to understand it properly. I believe that MyUtilityGenius can help end that ignorance, free that tethered goat and force everyone to review the rules of the game.

 

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