Bishop Hill The crisis starts here
Sep 25, 2013 Climate: Parliament Energy: grid Peter Atherton at Liberum Capital has written another of his trenchant newsletters about energy markets, today responding to Labour's new policy proposals (if I can dignify the party's grandstanding with that name).
Yesterday the affordability crisis that we have foreseen in our April report became a reality. In response to rising gas/electricity costs, the Labour party promised to impose an arbitrary price freeze on energy suppliers from May 2015 to January 2017 should they win the next general election. Labour predict a £4.5bn hit to suppliers. In other words Labour are proposing that the supply companies pick up at least £4.5bn of the cost associated with government policy implementation.
The implications are horrifying. Read the whole thing, it's staggering.
Meanwhile, Joss Garman of Greenpeace tweets that Atherton's views are 'utter bollocks'. He seems to actually believe that investors are going to be forthcoming with the vast sums of money required to meet decarbonisation targets and, more critically, to keep the lights on, while all the time operating under a price cap! This is so otherworldly as to almost defy belief.
Reader Comments (40)
Strange response, and there was I thinking the energy market would wholeheartedly support this attack on their substantial profits in this monopolised market !
What a gift to Cameron. He’ll be able to campaign on the slogan: ”vote for our sensible green suicide policy, not Labour’s silly green suicide policy”.
Centrica's response to the Millepede's announcement:
Meanwhile Centrica and SSE share prices drop over 3% today...
Perhaps we should start up a Portable Generator dealership? Bound to make money...
SSE's response to Millepede's announcement:
EON's response:
This is great news. Red Ed has gone for broke on a guaranteed failure of a policy and Greenfascism is backing him.
All that Cameron needs to do is to adopt a sensible energy policy of reducing windmill subsidies and kick 25% thermodynamically efficient STOR to touch, then bring forward the idea of 10 GW domestic CHP via fuel cells and Stirling engines to use the methane grid and fracking as a parallel power grid.
In the day the 55% efficient fuel cells will act as standby and save 115% of the methane use compared with windmills plus STOR, ~200% CO2 emissions, and a 3 year payback for the extra investment.
In a year, the inefficient wind farms will go bankrupt and will be subsidy free; vast reduction of power costs all the way round....:0)
So, let me get this straight
Labour do nothing about energy policy for the 13 years they were in power other than lay the foundations for prices to increase massively due to decarbonisation. Then when the inevitable consequences of deliberately seeking higher prices starts to becomes reality they want to put the costs of government policy on to the power companies and thereby ensure the govt policies won't be enacted as the power companies will walk away.
This is the same kind of thinking that enabled Labour to import two million people then when houses are needed to accommodate them think its a good idea to confiscate the land banks of developers.
Bribes for the electorate. Of course not
tonyb
They can always re nationalize the National Grid.
So lisspy pip spitter Milliped has made enemies of all the power companies who are now threatening blackouts and he proudly lambasted Rupert Murdock, their is finally some economic growth Nick Glegg has seen of a leadership challenge couple of public sector post office and fire brigade strikes Cameron and Osborne have tax cut sweeteners ready up their sleeve.So what are the new odds from William Hills Paddy Power and Ladbrooks on a Labour win.
Think, cheap energy = jobs and security of supply = a global strategy = makes Britain stronger and more independent.
But we can't have that now can we?
Energy supply companies and generators of nuclear, coal and gas fired power supply - in general do a pretty good job.
Politicians and blame Liebour as well as Tory/Libdumb make efficient energy supply nigh on impossible - now that there is no rationale to countering the effects of non existent chimera, ie that of man made global warming - would it be too much to entreat of our loonytune political claque to fork off smartly and leave it [energy provision] to the experts?
But oh no, not a bit of it, Ed Miliband wants to meddle and further weaken an already fragile system, he can't flippin help himself can he?
The government must decide, whether it wants an efficient energy sector or, proceed as they are doing to ensuring Britain will be plunged into darkness. In the forthcoming winter or, the next - it will happen anyway but - Miliband the lesser and his cracked energy policy will bring it so much closer.
If a serious outage occurs, a shutdown in part of the system, the knock on effects - the ageing grid will be badly damaged, the step down transformers will be blown - repairs will take weeks and it could happen - if this winter is exceptionally cold - the resultant death rate will be enormous [imagine last March and think no lecky for weeks].
Good Lord and crikey - the NHS can't cope with minor flu epidemics.................Nightmare scenario, heavy snow leads to major arteries - roads and railways blocked, supermarket shelves empty fast and food runs low, then a prolonged blackout and a rampant viral infection, a breakdown in civil order.
We couldn't cope, we can barely cope now.
I think Labour's position on this is becoming clearer.
Taken along with all the other hints about re-nationalisation of other industries, it's starting to look a little bit like this is an attempt to provide the 'failing industry' environment for a back-door nationalisation.
Imagine Labour win the next election. The energy companies would have already read the runes, and would have exit strategies and legal action in place as they simply can't operate under those terms – when there's a whole world of customers out there. The price Will not only kill their profitability but would drive them into debt in the UK market.
The new Labour government would be able to shamefacedly grandstand about ‘evil energy companies’ refusing to drop prices, or bailing out of the UK market. And then surf the wave of popular discontent (which already exists) into a re-nationalisation of the energy system in this country.
Price controls are just the way in.
The fact that it won't work, or help the energy customer in any way at all is irrelevant. Socialism never cared about that.
Yes, Milliband has gone Full Retard with this one.
Many obvious criticisms have been made already, but I am always baffled that supposedly intelligent people like our political elite think that competition should differentiate suppliers in a mature market. Perfect competition does exactly the opposite; it makes suppliers' offers more nearly identical precisely because they are in competition and so react quickly to match any rival's advantageous offer. No one ever gets the upper hand. Six major suppliers is enough to be confident that (near-)perfect competition exists. Certainly no one has claimed to have evidence of extensive anti-competitive practices or collusion. In fact even the most minor infringements of competition rules are dealt with quickly and severely.
No, energy is expensive because of market forces, social and environmental policy burdens, and because energy suppliers are discouraged from increasing supply by various government policies--of which price control promises to be the crowning catastrophe. Prices do rise relentlessly, even when spot-prices fall, but I am glad companies use forward hedging to smooth the price rises to approximate the trend rate. I don't want an unexpected monster bill even if it is followed by a somewhat lower one next time if I can have a predictable series of bills that cost me the same in the long run.
None of this is to say that energy suppliers are our best mates. They are just money-making ventures that pare operating costs and services to the bone to pay dividends to our pension funds. And if you think their customer service is crap now, wait till Milliband turns them into loss-making ventures.
Sep 25, 2013 at 10:48 AM | TerryS
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I am not surprised by the response of SSE.
I have repeatedly made the point that the cost of energy supply is only 50% of the electricity bill total, and that the other 50% is incidental to government policy. I believe that this is not appreciated by the average consumer and the government is being disengenuous when it seems to suggest that the consumer is paying less than £20 or thereabouts (I seem to recall a figure of £12 bandied about by one government minister) towards the renewable energy policy. I estimate that the typical consumer is already paying about £450pa because of government policy (if one has only electricity, ie., this is used for heating as well, then the cost is more than this).
My most recent comment was under the Political Murder article where I go into more detail. Readers might like to take a quick look (not that I am suggesting that anything that I have to say carries with it great weight).
So the gas/electricity suppliers are effectively going to chip in £4.5bn to help Labour get elected? Why does that sound improbable? I wonder what Plan B is. Nationalise them? How funny if Labour's stupid Human Rights Law (which Mr-never-turn-the-back-Cameron has failed to repeal) makes nationalising something an infringement of shareholders human rights. After all, should it not be part of the human rights stuff that governments can't go around expropriating owners? Or perhaps - simple - any such court challenge gets put in front of the right kind of judge, the kind of judge that thinks foreign rapists and murderers have lots of human rights but rotten little kulaks have hardly any at all.
There are many good observations above.
Stuck-Record (Sep 25, 2013 at 11:52 AM) says: Imagine Labour win the next election. The energy companies would have already read the runes, and would have exit strategies and legal action in place as they simply can't operate under those terms – when there's a whole world of customers out there. The price Will not only kill their profitability but would drive them into debt in the UK market.
People often do not appreciate that a company must by law run at a profit. If the directors continue to trade a company which runs on an unsustainable debt basis (ie., it is in effect insolvent) they may incur personal liability. Accordingly, it is not simply the desire of every company to be profitable, it cannot continue in business long term unless it is profitable (obviously there are short terms ups and downs, and a company does not have to make a profit every year but the prospect of profit must, as a consequence of the legal framework under which companies and their directors operate, be sound).
I am pleased to see this announcement since it will lead to MSM interest in energy prices which in turn will lead to scrutiny as to how these are derived and sooner or later the role of government energy policy (and the high costs that this forces upon the consumer0 will be revealed under the spot light of MSM. This will no longer be restricted to blog commentators. Labour have lifted the lid, it is likely that a pandora's box will be revealed.
Power companies really ought to remind customers on every bill, the Feed-in-Tariffs that oblige them to buy power from wind- and solar- subsidy-farms at up to 14.90p/kW.
Ideally, this info should be adjacent to the lower price they actually sell those kWs to their customer.
For readers who've not looked at their own power bills recently, UK Day rate is approx 14.5 p/kW, and UK Night rate is approx 6.6 p/kW.
So at night, power companies are obliged to buy their product from wind farms at up to 225% MORE than they can sell it for.
They should itemize these separate defacto taxes on their bills then just like Ryanair do. When the consumer sees the cost of green initiatives they might just think a bit more about it.
StuckRecord, I think you give Miliband and Labour too much credit for having thought this through. They clearly haven't.
'Energy bills to be frozen..'
'Free childcare places..'
'200000 new homes..'
'Free bike for every boy on his birthday..'
'Free phone for every girl on her birthday..'
'Free holiday at Center Parcs for all families..'
'Free beer for all men at the weekend, and wine for the ladies..'
Actually I made some of these up - but you have to have got the impression from what was on offer at the Labour Party Conference, that some or all of these would figure in their 2014 Conference...
They probably aren't allowed to itemise bills like that, just as IIRC the filling stations aren't allowed to advertise how much of the cost of a litre of fuel is tax, and retail stores are not allowed to show prices ex vat.
Miliband's energy policy makes me wonder just what size of brain has been implanted in his strange shaped scull.
NW
I wonder if you're right about showing prices ex VAT.
The headline price must be tax inclusive but I'm not sure about the breakdown on receipts. Certainly almost every account, invoice, quote that I get here in France has the tax itemised separately.
Mind you, there's a pretty good chance it also shows the price in francs as well! Presumably based on the exchange rate at the time of conversion. I wonder if there are a large number of franc notes and coins in a secure lock-up somewhere just in case, as there are rumoured to be marks and pfennigs in Germany.
Just speculating, but the French conversion back could probably be done in less than a week!
I think they can show it on the receipt (because who looks at receipts?), but the shelf edge price can't show it.
richard verney: "People often do not appreciate that a company must by law run at a profit."
That's misleading. A Board is required by law to ensure that its business is a "going concern". That means that it must have the resources to avoid bankruptcy. That's not the same thing as making a profit - or at least not in the short term. Energy companies plainly have the resources to overcome 18 months of fixed prices. However, Boards have a duty to their shareholders to ensure that investment is optimised. Hence, for example, the Liberum conclusion that "Centrica should accelerate its already announced move to switch growth capex [capital expenditure] away from the UK".
Peter Stroud: "... in his strange shaped scull." IS that what keeps him afloat?
Seems to me that detailed itemisation of bills is where the answer lies. These days, consumers are presented with an increasingly intricate - and legally required - breakdown of ingredients whenever they buy goods. And yet an account of the money they paid a supplier for those goods remains veiled in secrecy. Should consumers know that only 52% of their money has ended up paying for the actual gas used - and have a detailed list of where the remainder was spirited away to - it would empower both client and supplier.
Before people get too carried away with this 50% meme - my understanding is that an additional 25% is transmission costs. That in no way detracts from the many ways in which consumers are being ripped off. But, let's not go charging off all over the place without a firm grasp on the facts.
johanna
I think "transmission costs" could be persuaded to cover a multitude of sins!
By the time Ed's price freeze could come into effect where will we be with fracking? I could half imagine Ed's been led to believe that a gas bonanza will see wholesale prices stay fairly static so the real cost of his proposal would work out at not a lot. The supposed cost of £4.5 bn to suppliers would require energy prices to continue to rise but fracking could cause a pause in that.
The energy companies will immediately raise the their prices in all Labour constituencies until the election, to cover for the price freeze.
NW
"They probably aren't allowed to itemise bills like that"
Very likely. I asked British Gas to break mine down and they said they couldn't, although I noticed on earlier bills there was a distinction between normal taxation and 'government obligations' - more recently they've been rolled together.
Johanna: 'Before people get too carried away with this 50% meme - my understanding is that an additional 25% is transmission costs. That in no way detracts from the many ways in which consumers are being ripped off. But, let's not go charging off all over the place without a firm grasp on the facts.'
EON: 'Around £22 went to the companies that get the energy to our customers' homes for use of the pipes and wires.'
Sep 25, 2013 at 1:22 PM | NW
the filling stations aren't allowed to advertise how much of the cost of a litre of fuel is tax, and retail stores are not allowed to show prices ex vat.
Why on earth aren't they allowed to do so? Isn't this country supposed to be a democracy? Isn't free speech a human right? Even if there is some law preventing petrol stations showing how much of the cost of fuel is tax they could simply ignore the law. If the authorities then prosecuted them the garages would have public opinion overwhelmingly on their side and the garages concerned would get a lot of welcome publicity. In contrast the government would get a lot of well-deserved bad publicity!
It is dangerous to assume what public opinion will do, given the effort and resources that modern governments put into manipulating it. A substantial percentage of the public believes that these taxes are necessary to combat CAGW, because the myth is pounded into them at every opportunity.
If there were to be a prosecution, do you think the BBC and the rest of the left wing press would cover it?
Sep 25, 2013 at 1:56 PM | Robin Guenier
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You appear not to have read the totality of my comment, eg., "...runs on an unsustainable debt basis (ie., it is in effect insolvent)...it cannot continue in business long term unless it is profitable (obviously there are short terms ups and downs, and a company does not have to make a profit every year but the prospect of profit must...be sound)."
Further to the point made by mike Jackson, my electricity bills in Spain are broken down. They clearly state (and show in a pie chart) that the cost of supply is about 48% (it seems to varry between 47.3% to 48.8% presumably due to market variations in the costs of coal, gas etc used for energy production) of the final bill total and about 52% of the total is subsidies, green taxes etc associated with renewables and IVA (Spanish equivalent of VAT)
As regards the UK, companies cetainly may advertise the net of VAT price, and many (particularly those that primarily supply to the trade) do just that. Obviously they have to make it clear that VAT will be added and when the invoice is rendered it shows both the net price and the total VAT payable. I understand that anyone who charges VAT has to show how much VAT has been charged, ie., is obliged to give a VAT receipt. This is because the purchaser may be able to reclaim the VAT and needs a VAT invoice for such accounting purposes.
As regards petrol stations, I do not know whether there is a specific law preventing the station froma dvertising the net of tax price of petrol. There may well be restrictions relating to its advertised by the road sign price since motorists when driving at speed could not easily make the required comparisons and ascertain the final price that they will be paying and thereby decide whether to fill up at that station or another further along the road. Additionally, there may be legislature as there was in Australia which prevented suppliers from detailing the carbon tax which was much hated by the public. Politicians in the UK may be fearful that green taxes would be unpopular if fully transparent and may therefore have enacted some legislation restricting the precise detailing of these.
Richard, I think that you will find that Spanish electricity is much more heavily subsidised in favour of "renewables" than it is elsewhere. Spain has possibly won the gold medal for lumbering punters with shadow taxes. The results in terms of the Spanish economy are there for all to see.
Rating agency Fitch wasn't too pleased either:
"Fitch Ratings-London-25 September 2013: The UK Labour party's pledge to freeze gas and electricity tariffs for 20 months from 2015 could, if implemented, hinder much needed investment in the sector, Fitch Ratings says. The plan to freeze bills for all customers would be more restrictive than tariff controls in any other major EU country and could weaken the independent, transparent and predictable nature of UK regulation, which currently supports credit ratings in the sector.
The policy was presented as necessary due to overcharging and a lack of competition, but we do not see falling competition as a significant cause of recent energy price increases. Instead, commodity price volatility aside, the biggest drivers have been changes to energy policy, including the promotion of renewables, and the need to invest in network infrastructure, which is also partly due to increased renewable energy generation.
Government energy policy and infrastructure investment will probably push bills even higher by 2015. RWE npower has estimated the cost of these factors alone could increase by 16%, adding a further 6% to bills. If the plan is implemented, or if there is a strong expectation in the industry that the Labour party will win the next election, then companies are likely to cut back on investment due to perceived weakening of the operating environment.
While there are tariff controls in other EU countries, including France, Spain and Italy, these are not universal. EU energy policies generally promote progressive liberalisation and competition, albeit hindered by growing renewables capacity, which remains subsidised.
We have previously highlighted the impact that these tariff controls can have on utilities, most recently in Russia, where the government plans to freeze 2014 tariffs for natural monopolies, including network utilities. We cited Russia's plan as an example of the country's unpredictable regulatory framework, which is a key constraint on utility ratings.
The UK regulatory regime, on the other hand, has helped to support the stable outlook for integrated utilities. This is due to awareness of the scale of investment needed in the sector and the need to strike a balance between giving investors reasonable visibility of returns, safeguarding security of supply and avoiding excessive costs for consumers. A price freeze would shift this balance significantly and could undermine the support the current system provides for utilities' credit profiles."
Maybe its a Scottish thing, but I'm fairly sure ONLY companies which supply substantially to the trade can display ex vat shelf edge prices. Machine Mart, for example is allowed to do it, but there was another retailer (Maplin? B&Q?) who was prevented from doing it.
This report on the rolling blackouts in California is also pretty grim reading for Milliband's latest wheeze:
http://www.nae.edu/Publications/Bridge/OurEnergyFuture/TheCaliforniaElectricityCrisisLessonsfortheFuture.aspx