Fix Your Price 2

We only know what we over-read in the train from Staines this afternoon. (You shouldn’t take your work home with you!) See previous blog.

To cap prices until 2011 may be a goer, but to fix them, so any price falls over the next three years don’t come your way…? Cap at today’s price, ask for the energy monitor you’re entitled to ask for, and perhaps you can follow the market down, if that is the way it pans out. But to lock in until 2011. Don’t be as stupid as BG is cynical.

Petrol prices have fallen about 4 or 5 pence per litre over the last week. Want to fix at 1.14 pence per litre for the next three years? Then you might like the BG offer. Give us your lotto numbers while you’re at it.

What makes us suspicious here is how BG said at the start of July there would be a 40% increase. And since then, see today’s earlier post, prices have dropped 15%. But you don’t do a major TV and print campaign without some preparation. So, did Centrica/BG simply trouser the 15% drop for gas year 2008/09 and this will appear on next year’s profits?

Speaking of profits, Centrica issues them tomorrow.

No Hot Air Energy Procurement

To paraphrase Mark Twain on the weather, everyone talks about climate change, but nobody does anything about it.

No Hot Air Energy Procurement Services is an energy consultancy unlike any other. No Hot Air means a low carbon world but also underlines our feeling that most companies are paying too much money for too much information for energy advice.  Paradoxically this information overload actually delivers prices higher than they could be.  Intervening in energy markets causes costs, whereas understanding and managing them reduces costs.  We aim to provide clear thinking on business energy. If you like the unconventional wisdom seen in these pages get in touch. 

No Hot Air is all about using and buying energy today and in the future – not the past. It’s a new era and there’s a new spirit out there. No Hot Air not only means a low carbon future – it’s also about removing the layers of (expensive) hot air surrounding energy purchasing and consumption.

NHO believes that in energy, less is more.  Less time, less money, less hot air equal greater results for your business and the planet.  We also believe less is more in energy consultancy fees:  our fee structure is less than 1% of annual spend.

We aim to have a service rolled out in the next few months that will enable all business users of whatever size to access all products, but for now we can only advise energy users with an approximate annual spend >£500K.  Please don’t hesitate to contact us to register interest whatever size consumption you have.

No Hot Air is published by Nick Grealy who has 15 year experience in the UK gas industry at supplier, buyer and consultant level.  I have a track record of managing all size of end users from chip shops to steel mills.  My most recent experience has been managing gas, and later telecoms for the UK National Health Service, where I delivered savings of over £200M  over seven years.

Going forward, I want to roll out energy information services to all level of gas and power end users.  That starts here, reclaiming the energy narrative from those who have a vested interest in herding end users into thinking that the only way for energy price is up.

The UK energy narrative needs to be updated to reflect reality.  The coming impact of low prices means that fixed price contracts are the worst option. Ensuring energy prices only insures increased costs,not only in the actual price, but in how people pay for energy advice.

NHO is not aimed exclusively at energy buyers. We are for any energy payers. Let’s face it most people, even in business, pay the gas and electric bill and that’s it. But that approach is getting expensive and not only in P/L terms. Today any company that  uses less energy, and can prove it, has a lower carbon footprint which is a growing competitive advantage. Imagine that: a competitive advantage that you don’t pay anything for. How good is that? It gets better: using less energy obviously costs less. Straight to the bottom line, with only a very short stop at GO.

We’re aimed at the eighty per cent of business people who want to do the right thing. We’re also aimed at the eighty per cent who don’t feel informed enough about their carbon footprint, have little if any idea of what their actual energy use is and realise that life is more complex than stereotypes of tree-huggers or motor-heads.

We don’t do preach, there’s enough of that going on. We simply lay out information and let you decide based on twenty-first century realities, not yesterday’s fallacies. Look around you. Tomorrow is already here. 

We don’t have a crystal ball on what’s going to happen in energy. On the other hand, no one needs to cross our palm with huge quantities of silver.  Less is more for your bottom line.

Instead of the last word on the same old same old, read the first word on the new.

Contact us at guru@nohotair.co.uk

No Hot Air is a trading name of igasandlectric.com

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iGasandElectric.com aims to provide insight into current and future developments in UK and International energy markets. We aim to reflect a correct view of the current situation and potential future developments in these markets, but IGASANDELECTRIC.COM Limited cannot be held responsible if this should prove not to be the case or if any of the conclusions drawn in our products prove to be inaccurate.

British Gas up by 35%

British Gas has just upped gas by 35% and electricity by 9% or 25% for dual fuel.  Just like EDF’s price hike of last week, this one is with immediate effect.

Pre Payment Meters (or Poor Pay More meters as energywatch Chairman Alan Asher calls them) are up by a mere 21%, which considering they were the most expensive payment method anyway isn’t as charitable as it sounds.

Not yet approaching a comfort zone..

One core principle of NHO is not to spend much time obsessing about prices and expend energy on saving energy. Using an index price can be actually liberating – no decisions, no buyer regret, no wondering if the price could be better tomorrow or next month and for many people, no second guessing a third party introducer who may or may not have your best interests at heart.

Prices this year, as everyone will tell you have gone ballistic.  What a supplier or 3PI may not mention is the fall during July.  But it depends on when you spoke to them, and how informed you are about the market.

For example, if you hired a 3PI a month ago, and use a moderate amount of gas, let’s say  2 gWhs (2 million kWhs).   We’ll go commodity only here, for one year fixed from October 07 and 08.  Last June that would have cost roughly £25K.  Last month Centrica came out with it’s 40% price increase forecast, and you figured it should cost £35K.  (You hadn’t read www.nohotair.co.uk and didn’t realise that prices were far worse than that)  You had once used a 3PI but figured you could do it yourself next time.  So you approached your supplier and they told you, on July 4 –  £68K.  That was actually the best market price avaiable on that day. 

Today, that price would be just under £58K.  Your 3PI may try to take the credit (in which case they would have tried to sign a percentage savings against renewal offer deal).  Percentage deals are very energy inefficient:  it makes more sense to stop burning gas and simply set fire to a wad of fivers- it would provide the same calorific value at the same cost.

An honest 3PI would point out that they simply followed the market downwards, thanks to their forecasting skills.  But if they had offered  a deal for £60K last week, they won’t mention today’s price.

Forecasting the future based on past events is as useful, and honest, as fortune telling.   No one can predict oil prices, politics, weather or lottery numbers for next January.  But fixing a one year price is not only making that prediction, but putting money on it. 

The bottom line still a 100%+ increase in gas.  The electric bill will be a marginally lower hike. On an index price it may get worse!  But if it gets better, the value is lost.  Is certainty over energy costs that valuable?

 

Why fixed?

An almost unique, by world standards, peculiarity of the UK gas and power markets is the compulsion, stress, emphasis or plain old obsession with fixed prices of one year or longer.

Isn’t business a whole shot in the dark? Isn’t it at the end of the day, a gamble, that your particular product or service can, or will, be sold to the punters?

So why do so many business people, in a misguided attempt to mitigate “risk”, lock energy costs into one year or longer fixed prices?

Fixing a one year energy price today is no more reliable than betting on lottery numbers, or if it will rain a week from Friday. The emphasis on what happened in the past is not only unhealthy, it’s also open to doubt, suspect and above all: open to change. Know exactly where your business will be next year? Are you a good businessman or psychic?.

Fix an energy price today and you have a 1 in 365 chance of being lucky. That is rubbish odds in our book. Fix a contract today on an index price, and it may go down, it may go up. But it will never, ever, ever be worse than the average of what any competitor is paying. Why pay a third party introducer a fee to have less certainty? Or are we missing something?

In a best-selling book, “The Black Swan,” Nassim Nicholas Taleb, a former trader, criticized economists for exploiting “our desire to be fooled by a simpler representation of the world.”

“I cannot find a single convincing argument that tells me that astrologers won’t do better than economists,” Taleb said last week by telephone from Lebanon, where he was mountain-hiking. “The problem is the arrogance of these economists. They’re making people rely on theories that have not worked, do not work and are really dangerous.”

Nicholas Taleb knows so much more than most people. And he starts by admitting he knows nothing. If he had to worry about his gas bill, (unlikely), he wouldn’t go fixed in a million years.

eon and npower on Smart Metering

Taken from the evidence given to yesterday’s Business and Enterprise Committe Report.  Surely Ofgem can’t ignore input like this?  Here’s hoping Ofgem have just been talking about the roll-out of smart metering for too long, and if there was one thing I would really like to see from your Committee report it is a very clear direction that we should get on with this, because, quite frankly, we are using Stone Age technology here; we know we can do better; we just need to agree the process by which we roll it out Paul Golby, head of eon UK The problem is how fast you do it, and I have to say here is an area where a stronger politicaland regulatory lead would be very, very helpful, not just in prepayment meters but, actually, in smart metering across the entire UK estate. We have seen, in other countries like Italy with a very, very strong regulatory drive to mandate, the roll-out of smart meters. I think they delivered it across the whole country in about five years. If we really want to make a difference to the quality of data, to the way customers are served and to the accessibility to competition, then a much, much more rigorousapproach to rolling out smart metering, I believe is the right approach: Andrew Duff: Chief Executive, RWE npower

What the papers didn’t say….

but the Business and Enterprise Select Committee did:

However, around half of customers are still with their original supplier for at least one fuel, and 20% have not switched either fuel source, despite the fact that incumbent suppliers consistently fail to provide the
best available offer in their home areas. Moreover, most people who do switch fail to
change to the cheapest supplier, and a significant number actually move onto a more
expensive tar
if
f. Ofgem is considering these issues as part of its probe. We believe its
recommendations should include new ways to engage consumers that have not
switched away from their incumbent supplier, and it should consider ways in which
customers who do switch can make more informed choices>

We believe smart meters would play an important role in facilitating competition in
the retail sector by giving consumers better information about their electricity usage
and cost, thus encouraging greater and more informed switching. The Chief
Executive of E.ON UK told us: “we should get on with this, because, quite frankly, we
are using Stone Age technology here; we know we can do better; we just need to agree
the process by which we roll
it out”.184 We agree, and hope the Government’s decision,
due by the end of the year, includes a clear and urgent timetable for implementation.

Around half of switching for small businesses is transacted through brokers.192
Electricity4Business also told us how these third party intermediaries have an incentive to
place customers on more expensive tariffs because the commission structure rewards
brokers for signing customers up for higher valu
e contracts. The company described this
part of the industry as “completely unregulated”.

The evidence put to us by small companies in the market for SME electricity supply
is compelling and suggests some of the ‘Big 6’ companies may be abusing their market
position to choke off new entrants. We are also concerned by the role of third party
in
termediaries. We welcome the fact that Ofgem is considering small business
customers as part of its probe. We believe that until now Ofgem has in the past paid too
little attention to this important part of the market. If it finds evidence of serious anti-
competitive behaviour by specific companies, and is unable to address this situation
with suitable undertakings, it should refer the matter to the Competition Commission.

Heading to the Front Page….

But this time with something new to stay, thanks to today’s report from the href=”http://www.publications.parliament.uk/pa/cm/cmberr.htm”>Business and Enterprise Select Committee

The Committee appears to blame wholesale markets more than in the past, although of course the entire UK gas industry was steered by the government down this path. The particular gripe appears to be that longer term prices are higher since they aren’t very liquid. Isn’t that the point of markets, that the most important element in setting prices is the spot?

UK end-users have themselves to blame due to their fascination with long term prices. Every other world market is perfectly happy to have floating prices based on an index. But UK users demand “certainty” over future energy costs. A one year fixed price sends a message to markets that demand will be there in January or February 09. Why be surprised when the market gets pushed up. Isn’t that where demand plays it’s role?

But end-users who mostly have dumb meters which makes it very difficult to access day-ahead or month ahead prices: The villains of the piece are a combination of National Grid, gas suppliers, the government go-slow on smart meters but also the actions of consumers themselves.

Energy consultants won’t offer index prices since they fear that the penny will drop to end-users. What exactly am I paying you for again?

But we’re not talking pennies: The UK 3PI (Third Party Introducers) thrive on the outdated, and completely untrue, notion that choice of supplier makes any difference. End-users, with their compulsion for “risk free” prices act against their own economic interest demand fixed prices, but complain when overseas competitors pay less over time with index prices. But other nations also use index prices to use gas and power efficiently giving them a double advantage: paying less for using less.

The big mystery to us is why do UK suppliers pay out so much money (£40 to each domestic switcher and up to 8% of contract value to I+C electricity 3PIs). Given the size of the market these days why do they still act against their interests by sharing value with 3PIs?