Wednesday
Dec182013
by 
Bishop Hill
Bishop Hill Why energy prices are rising
Dec 18, 2013 Energy: grid Manic Beancounter has been digging into the official figures for energy prices and costs to see if claims of profiteering by suppliers and generators hold water. In short, they don't.
What is most important is why unit costs have risen. Labour are correct when they say it is not due to the wholesale price of energy. As already demonstrated, they are incorrect to say it is due to rising profits. The real reason is “other costs”. These rose from 32% to 40% of revenue in just four years. That is from £14.1bn to £17.7bn in just four years or a 25% increase. On declining volumes this is more significant for consumers.
Other costs includes things like windfarm grid connections and green levies. Read the whole thing.
Reader Comments (36)
A rather spendid piece of work methinks, my thanks to the Manic Beancounter.
Indeed " factors outside of the energy supplier’s control" what we suspected and is now confirmed.
Furthermore and this shows up Miliband's play for what it is - 'a price freeze' - is a fake, a sham.
A vote winner - Ed the red is only interested in political power he doesn't care a jot for your domestic power - he actually wants to increase domestic prices to pay for the policies he set in train, ie the green agenda - a price freeze may happen [imho I doubt it - it's what happens to manifesto promises] but the burden of costs for ROC, carbon floor price, feed in subsidy, birdmincers etc would be borne by the public somewhere and somehow. Miliband, Marxist to the core and deals only in smoke and mirrors - as they, Clegg and Cameron - all do.
"So it is likely over 75% of the price increases to the customer are due to factors outside of the energy supplier’s control."
That may be an understatement on what is, in effect, state interference in the market. If I am reading this correctly, the cost of energy (direct fuel costs) does not factor-in the higher cost of renewable energy as a proportion of the mix?
Athelstan
I think Miliband wants to cause the market to fail, so they will be forced to renationalise it. I think he does care about our domestic power but only as far as messing with will bring about his Marxist Utopia.
Whichever way it ends, we pay - that is the take home point, as they say.
Brits are the most inventive society in history. Now they've invented the most expensive way to freeze oneself to death.
Andrew, I have a couple of posts up on electricity. The first delves into the incredibly complex system of market mechanisms in the UK and tries to explain why the man in the street is being ripped off. The second shows the scale of the challenge and futility of trying to convert our electricity system to renewables.
Brave Green World and The Cost of Electricity
The Coire Glas pumped storage scheme - a massive but puny beast
Might add that Milliband's plan is bonkers. Freezing prices takes us straight back to commie politics. The depressing thing is that Milliband is / was a sitting duck but the Tories seem to have lost the ability to shoot. A price freeze will simply limit the amount of energy available to the UK and since we use energy for everything it will limit what "we" are able to do - apart from freeze in the dark and get poor.
Manic's analysis of company profits is one good approach to the issue of electricity prices. Underlying wholesale energy prices ARE a major contributor up to 2008 and I suspect there will be upwards pressure on gas prices again. A major cause of upwards pressure is energy policy - its not rocket science. Ban use of the cheapest and force use of the most expensive sources available.
Ed El-Red The Unready. What an awful amount of harm that man and his brother and their coworkers in the previous government have done to the UK! It really does look like they hate us all.
One factor missed is the forward buying of fuels by the power companies. Due to government modelling the assumption was that fuels would continue to rise so power companies were encouraged to forward buy fuels for 5+ years ahead. This locked them into contracts that are difficult to get out of. Meanwhile fracking in America has reduced gas spot prices by over 75% which in turn has reduced world coal prices to the point that coal is now the cheapest fuel available. Our power companies continue to buy at their sky high contract prices.
John Marshall, a very good point. Hedging profits and losses are incredibly difficult to analyse. I believe any hedging profit / loss on a contract needs to be accrued in the current year and adjustments then made in subsequent years. Its totally opaque.
John Marshall,
Excellent point, something we never get to know - who sits in - the EU[?] - intercontinental exchange, the players [Gazprom, Statoil, Gulf States?] and who actually commands these price negotiations - where does our government [DECC] fit in - if at all?
Churchill's quote springs to mind, though he was writing about Russia but it could equally apply to our energy price conundrum:
"It is a riddle wrapped in a mystery inside an enigma"
- all we do is pay, pay and pay more.
Very helpful Manic, Eaun and John Marshall. One of the little known aspects (as far as I know) of the downfall of the Aussie tycoon Alan Bond in the late 80s is that just before he ran into trouble he had hedged, for the first time ever, a metal he was mining, locking in what he thought was a good price but turned out to be a particularly low one as his need for cash became intense. I know because I was doing some programming work for the poor guy who had, under instruction, implemented the hedges in London. The great man came by a few times and was exploding at his own folly, before he finally went under. Needless to say he had time to fire the guy I was working for on the way down.
There was something honest about this mistake and its consequences though. (The rise in the price of this one metal would probably have been enough to save Bond.) One very rich guy paid - and some of his underlings. In the case we're now digging into the poor end up paying, to a very large degree. Shame on the Labour movement and all who sailed in her during this period.
This may be a stretch but I'll ask. Is it possible to work out how much energy prices should be without the 25% increase in other charges? If we assume a more reasonable rise in other charges and ignore levies as well as keep the same profit margins and fuel costs?
I'm just wondering because this would be an estimate of the impact of the Climate Change Act. If it turned out that energy prices should be say 10% lower this could be translated into an Ed Milliband tax per day. For emphasis of course.
Dec 18, 2013 at 12:30 PM | Unregistered CommenterMicky H Corbett
Is it possible to work out how much energy prices should be without the 25% increase in other charges?
Unfortunately even if it is possible, it will not tell how Cheap Energy could be.
I take it you are aware of the Drax power station modification and closure of "dirty" Coal Power Stations?
As has been stated Coal is one of the cheapest forms of energy available, the UK has 250 Years worth of Coal stuck in the ground, (courtesy of Wilson, Thatcher and the rest), which we could be using like Germany, Poland, China and India.
A C Osborn
That would the logical next step. I was thinking more about firstly working out a realistic estimate of government meddling. Then the choice of fuel as you say would further compound the idiocy.
Micky,
In reply to your comment Dec 18, 2013 at 12:30 PM, it is certainly possible to calculate the impact of the increase in other charges. However, this overstate the impact of the Climate Change Act, as it would not allow for other cost changes - for instance giving the energy company adminstrators their annual pay rises. There could also be increases in the costs of the National Grid infrastructure for reasons quite separate from the Act.
The whole business needs a proper independent audit, not just to find the actual costs so far, but to properly project ahead as to the true costs of policy.
Kevin (ManicBeancounter)
It's electricity that is affected by the renewables programme, and domestic supply that is the poltical issue. Using the link to the OFGEM data that the Manic Beancounter suuplies I checked out the EBITDA (Earnsings before interest taxation depreciation amortization) of three of the big six. I chose Centric, E.ON and RWE (NPower) because I have had supply from all three. It was quite surprising even given the Bishops comment:
........ 2009 2010 2011 2012
Centrica 139 163 (35) (35)
RWE.... (54) (101) (11) 135
E.ON.... 55 85 190 154
A price freeze could well make them quit the domestic supply business altogether, especially if the ROC/FIT/CFD obligations become more onerous as they must as more wind capacity is installed.
retireddave, Dec 18, 2013 at 10:32 AM
"home point" indeed.
Kevin
True, I appreciate that a full audit would be necessary.
I guess it would be nice to put a value on the Climate Change Act in isolation if possible.
There was an obligation for the suppliers to buy 48,915,432 Renewable Obligation Certificates (ROC) in 2012-2013.
At a cost of about £44 per certificate this represents £2.2 billion.
This year (2013-2014) the obligation will be around 64,000,000 at a cost of about £46 or roughly £2.9 billion.
Woah. Running faster than Usain Bolt does not seem to me to be the key priority when a solid walk of the kind Kevin has kicked off here could, if properly publicised by the likes of David Rose and taken up in the right way by UKIP and the Tories, change the electoral situation forever.
Richard
I can see what you mean. However it's a well known marketing technique to try and simplify the monetary cost of taking action. Or often not taking action.
It's also good to define metrics when possible. If after some work this value was reached it would be more powerful than an article by David Rose. Because you could tweet it in one line.
That's all I meant. Good work by Kevin at any rate.
MHC: I was thinking about all that but quickly came to the conclusion it would be false simplicity, for there are a million ways that any number produced would be rubbished and reduced. That would be much less the case, I believe, with a properly audited version of Kevin's breakdown of the increase in the average energy bill right now. The Tories would need to execute major mea culpas on this, whichever way it goes, UKIP as ever being needed to hold their feet to the fire. But Miliband would rightly mostly feel the pain.
Ed Davey on the World At 1 just said he wants fossil fuels prices to go up so that it will make Nucleur look cheaper
Micky H Corbett
I think that you need to divide the costs of the CCA into direct and indirect. Direct being those which would not have happened had the CCA not been put in place. This obviously includes all the green levies, possibly not smart meters though. I would also include the cost of the Beauly-Denny Transmission line which has only been built to collect wi
Girly gig power. That comes to £600+ million. There must be other capital outlays which are a direct result of the CCA and paid for using borrowed money.
Things like potential savings by using coal are not really a direct result of the CCA as coal has not been in favour for 30 years. Upgrading infrastructure shouldn't necessarily be assigned to the act as that should be part of the day to day costs. STOR and other backup for unreliable power sources are a direct-indirect if you see what I mean.
As you've implied it's of Byzantine complexity (much loved by Gordon Brown when chancellor).
AndyL
That's the kind of thinking that got us into the mess we're in now.
SandyS
I think that's a good idea. As a minimum the direct cost of the CCA would provide some monetary clarity. So a figure could be derived purely for levies. Everything else on top is probably harder to specify and as Richard was saying is more prone to being dismissed or argued away.
If our MPs want to do something useful to justify their salaries, why don't they draw up a league table showing the cost to the country of every bill they pass into law?
@Roy
Good idea, though a better one would be for them to repeal laws.
"European Commission probes whether subsidies are needed for EDF's Hinkley Point plant in Somerset and warns they could cost £17bn - more than the plant itself "
The Telegraph.
Richard Drake's suggestion of a proper audit of my figures is a good one. It is not difficult to do the analysis for yourselves, just a tad time consuming. The difficulty lies in the 2009 figures. In the first year the format was not properly fixed. For instance EBITDA was below EBIT. The difference - Depreciation and Amortisation - then had to be included in other costs, then shown as income to arrive at the EBITDA profit figure. In the actual data there was a couple of columns that did not add down. A first act would be to get all businesses to restate the figures for 2009 in the revised format. It is a fairly simple exercise. Then it will be possible to look at the split of "other charges" between direct and indirect costs.
The next is to find out where all the climate levy fees are paid out, with the relevant GWh produced, backdated to 2008. That is into the various categories like domestic solar and offshore windfarm. Also to split out the National Grid costs to understand the impact of the Act upon our standing charges.
All of this should not be too onerous for an independent auditor, and inexpensive next to the billions spent annually.
Some useful figures about Caithness wind farm at
http://www.caithnesswindfarms.co.uk/page4.htm
Please note that the figures are only up to September 2013.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
More facts and figures on wind farm safety are also at -
http://www.windbyte.co.uk/safety.html
Err...shouldn't the proposed itemised costs of the CCA have been worked out prior to implementing it rather than trying to disentangle it all after the event.
Is there not an official document somewhere with it all in that can be compared to what has actually happened. Cost/benefit analysis, project appraisal, ongoing assessment, that sort of thing.
Or don't we bother with such mundane stuff where "Green" is involved.
I reckon those directly attributable Wind grid connection costs would cause a stir if out in the open rather than hidden away under generic Network costs. And just wait until those offshore maintenance costs start rolling in too (or alternatively the downtime costs if we can't get out to fix them).
Don't suppose there has been much action on the Benefits side either (degrees C rise averted, hoho).
(ACMA, well until I stopped paying my subs years ago)
wonders if Richard Drake is suggesting that figures supplied to the industry regulator by the energy companies could not be audited and supported? From bitter experience, I know that, if a state regulator is on your back, you will be audited and audited and audited, so you ensure that any figures you supply have a very very very clear trail behind them. But maybe Mr Drake knows otherwise.
Kevin Marshall:
It would seem worth it to reach the MSM with full force. But very well done setting it in motion.
SimonW asks
One MP (John Redwood?) asked for the figures before the Act was passed. Cost would rise to £18bn a year. It was not debated in Parliament.
The CCA (here) includes a quantity Carbon Budget. Control of costs or maximisation of benefits does not matter. There was no adherence to the principle of the Stern Review, that without adhering to a benefit/cost approaches you can easily impose net harm on society. This is even with extreme views (like Stern) on the costs of climate change.
Thanks Kevin, I've not stopped to read the CCA in detail before.
This is the document the fragrant English graduate Bryony Worthington helped draft is it? And boy does it show. An astonishing document.
To start with, I'm not a chemist or physicist but seeing carbon dioxide described as "carbon" throughout an official document is just bonkers...is water described as hydrogen? If you mean carbon dioxide say carbon dioxide FFS.
I can see no mention of that £18,000,000,000 (I prefer longhand for these numbers) a year but we do get a chapter on charging for carrier bags (WTF?!) . Yet again, beyond belief.
If I've read it correctly (maybe not), this already unmentioned astronomical cost could spiral out of control and there's no provision to even monitor it let alone control it.
Oh but they do have a complex monitoring system in place for "carbon" but even that stops there. Surely limiting "carbon" is a means to an end; limiting temperature rise (supposedly). I would expect to see the impact of UK measures in degrees C as well.
As it's a global "problem" I would also expect to see how this stacks up against the rest of the world and their progress. On an ongoing basis, how is our "leadership"doing in persuading others to follow suit.(don't laugh at the back!).
Lunatics, asylums, etc etc...
Oh and forgot to say well done for doing all this. In the real world, exposing the reaons for rising Leccy bills is far more likely to sway the public than discussions on climate sensitivity.