Ciao!

We’ve been glad to notice a surge of page views recently, probably connected to our redesign which makes us easier to find even if you’re not looking for us.

As Al Jolson said at the end of the first talkie:  You ain’t see nothing yet.  In September we’ll be back refreshed and ready to make some serious noise.

But until then, we need to lie down.  Somewhere warm.  And dry.  Somewhere with smart meters everywhere.   Paradise!

Ciao!

Need an Energy Consultant? Maybe Not.

No Hot Air provides just that: we remove the unnecessary layers of complexity that have arisen around buying gas and power for UK business end-users.

Over a third of UK end-users use third parties to negotiate energy contracts.  We’d imagine that another third are active buyers with their own energy managers engaging with suppliers to varying degrees, and the other third, until 2008, didn’t think energy prices were worth bothering about.

NHO is for energy buyers who want to think for themselves, but sometimes wonder where to start. That’s OK. We’re not judgemental. Everyone’s been there. Unfortunately, although every business is an energy buyer, only the largest can afford their own energy manager. But at today’s prices, everyone is suddenly a large user.

Some businesses do need energy consultants, especially those with an engineering focus that concentrate on reducing use as  the number one way to measure results.  If a company doesn’t have a clue about how much energy they use, has complex multi-site portfolios with supplier issues or has no problem with paying (directly or indirectly,often both) outsiders to resolve key issues that impact profitability, then an energy consultant can help.

In reality, few business users actually need the third party introducers (3PIs) that are a singularity, in global terms, of the UK business energy landscape. They were needed ten years ago. But today, 3PIs are as useful as Filofaxes, The Cones Hotline and Mr Blobby.  Pfftt…

3PI’s will disagree of course:
  • They say they can get a better price through competition. Not that competition has no impact at all.
  • They insist that aggregating  consumption to their portfolio will get a better price. Not in a commodity market.
  • They explain how complex energy buying is. 3PIs owe their existence to arcane rules, inefficient metering and outdated pricing concepts. They have a vested interest in those market inefficiencies continuing, not removing them. NHO says energy buying can be far easier and uncomplicated with minimum investment and a little new thinking.
Many 3PIs are far less forthcoming on how they get paid. A 3PI’s reason for existence isn’t to cut your energy costs – it’s to maximise their revenue. They do this by taking a part of the value that should be divided between supplier and end-user. And they often do this in ways that work against everyones’ best interests. Except their own.

One of the easiest ways that 3PIs generate revenue is rampant in 2008: Sign clients at today’s prices for long term deals. Do they do this because they genuinely feel energy costs will be higher in the future and fixing is prudent? Or do they need either an immediately larger commission or a guaranteed revenue stream for future years?

Apparent free choice in energy is in reality affected by how options are presented. One pricing option is only offered by the most reputable 3PIs, self confident enough about the value of their work in other areas.That might explain why most businesses are never told about the option of pricing against an index: 3PIs can’t make money out of a default option.

Index pricing was once only for large energy users, but today most suppliers can offer the option to any user. At NHO we don’t confuse what happened in the past with forecasting the future. A rear view mirror is not a crystal ball. But we’re open minded and unbiased: If we see a story that tells us that prices are coming down, we tell you about it. Readers don’t have to act on it, nor on the reverse. But on the other hand, readers don’t pay us for the information. We don’t have a crystal ball. But no one needs to cross our palm with silver either. We aim to show ways to cut energy costs- and carbon- the old-fashioned way – use less of it.

3PIs will tell you at every opportunity about the dreaded R word: Risk. Maybe that’s why they are as hard to get rid of as insurance salesmen. We tell you: Index prices go up and go down. Just like life. Price spikes, however unpleasant, are unlikely to have a major impact on business for anything more than a short term. Markets do dumb things sometimes. But they don’t do dumb things all the time. Fix a long term price and – the price is fixed for a long term. A one year fixed price is definitely the best price – on 1 out of 253 UK business days. That’s a risk too, and not the kind of odds to go to Vegas – or the board – with. Transparent index prices incentivise enterprises to reduce energy consumption and make efficiency adjustments at times and places where they deliver the higher savings and shorter paybacks. That helps buyers better assess the green options available today, some of which are just free range snake oil.

A fixed price may seem smart sometimes, but if the market turns then the risk is that fixed prices are a significant disadvantage. At NHO, we just don’t know: but we won’t charge you for the opinion. A fixed price will give you the best price for sure. On that day. Tomorrow?  Most energy forecasting is glorified meteorology. Will it rain a week on Wednesday? Which way for oil, gas or coal?  Will your pension go up or down? Most people don’t worry – it’s indexed. Why not energy?

Index prices for energy are the norm in most countries, even for domestic users. Fixed prices are an outdated concept in the UK today – they were born out of the 1990’s. The dawn of UK competition coincided with a collapse in commodity prices. Many end-users mistakenly connected competition with energy price falls. It was mere coincidence.  Not that a 3PI would point that out of course.

Most countries now have utility competition: but in a world of rising commodity prices, competition is stillborn – < 2% switching rates in the US domestic supply market for example. US, European and Asian consumers  see no benefit in paying 3PIs money to spend money. They buy energy – not insurance. Competitors in formerly higher price markets concentrate on cost – not price.

Circa 1992/2000 the only way to buy energy was on a fixed price contract.  Buyers sought a guarantee of energy costs when comparing unknown suppliers against the default option of regional electricity or British Gas tariff rates. It wasn’t hard for suppliers to give lower costs in a falling market, and only the largest multi-million pound end-users were offered index prices that performed even better.

But today, the default option is the best option over time. No guarantees. But no buyer remorse. No second-guessing. No tiresome benchmarking. No blaming a consultant for high prices – but not paying commission for it either. The same prices as everyone else. Choose your supplier on service, which includes reducing volume and cost – price is irrelevant. 

In 2008 what was once a small spend is now a big spend – fixed or index.  3PIs are moving down the value chain to target inexperienced smaller gas and electricity users because at today’s prices they make serious money from fixed contracts – the longer the better. But they won’t make any money selling end-users the default option. Even they haven’t figured out a way to make money by advising clients to do nothing.

NHO is advertiser supported. Among those advertisers will be energy suppliers. But they won’t pay NHO a commission for anyone’s energy use. We think we can make money out of No Hot Air. But not at your expense.

An Open Letter to Energy Buyers

No Hot Air provides just that: we remove the unnecessary layers of complexity that are the usual context for buying business gas and power for UK business end-users.
Over a third of UK end-users use third parties to negotiate energy contracts.  We’d imagine that another third are active buyers with their own energy managers engaging with suppliers to varying degrees, and the other third don’t even bother. That third are very small companies. And will stay that way.
NHO is for energy buyers who want to think for themselves, but sometimes wonder if they don’t know where to start.  That’s OK.  We’re not judgemental.  Everyone’s been there. Unfortunately although every business is an energy buyer, only the largest can afford their own energy manager.
Some businesses have a genuine need for energy consultants, especially those who focus on reducing use as their number one responsibility.  If a company don’t have a clue about how much energy they use, has complicated multi-site portfolios with long running supplier issues or has no problem with paying (directly or indirectly, often both) outsiders to resolve key issues that impact profitability, then a reputable energy consultant can be useful.
Few business users need the third party introducers (3PIs) that are nevertheless, a singularity in global terms, of the UK business energy landscape.
3PI’s disagree of course:
  • They’ll tell you how they can get a better price through competition. Not that competition has no impact at all.
  • They’ll tell you that aggregating your consumption to their portfolio will get a better price. Not in a commodity market.  This ain’t paper clips.
  • They’ll also tell you how complicated energy buying is. 3PIs owe their existence to arcane rules, inefficient metering and outdated pricing concepts. They have a vested interest in keeping it that way. NHO says it’s easy and uncomplicated.
Many 3PIs are a lot less forthcoming on how they are paid. A 3PI’s reason for existence is to maximise revenue. They do this by getting a part of the value that should be divided between a supplier and end-user. And they often do this in ways that work against everyone’s best interests. Except their own.
One of the easiest ways that 3PIs generate revenue is rampant in 2008: Sign clients at today’s prices for long term deals. Do they do this because they genuinely feel that energy costs will be higher in the future than today and fixing is prudent? Or do they want to have either an immediately larger commission or a guaranteed revenue stream for future years?
Who has the most believable story?  A 3PI who has a vested interest in long term prices?  Or NHO who say, we honestly just don’t know where prices are going, but you don’t have to pay us anyway?
One pricing option is only offered by the most reputable 3PIs, self confident enough about the value of their work in other areas. That might explain why most businesses are never told about the option of pricing against an index: 3PIs know that they can’t make any money out of it.
Index pricing was once only for the very large energy users, but today most suppliers can offer the option to any user.
At NHO we don’t confuse what happened in the past with forecasting the future. A rear view mirror is not a crystal ball.  But we’re open minded and unbiased: If we see a story that tells us that prices are coming down, we tell you about it. Readers don’t have to act on it, nor on the reverse. But on the other hand, they don’t pay us for the information either. We don’t have that crystal ball.  But no one needs to cross our palm with silver.  We aim to show ways to save energy the old-fashioned way – only use what you have to.
3PIs will tell you at every opportunity about the dreaded R word : Risk. Maybe that’s why they are as hard to get rid of as insurance salesmen. We tell you: Index prices go up and go down. Just like life. Price spikes, however unpleasant, are unlikely to have a major impact on business for anything more than a short term. Fix a long term price and: the price is fixed for a long term.That’s a Risk too. Transparent index prices incentivise enterprises to reduce energy consumption and make efficiency adjustments at times and places where it delivers higher savings and shorter paybacks.
A fixed price may be smart, but if the market turns then the risk is that fixed prices are a significant disadvantage. We just don’t know: but we don’t charge you for the opinion.  A fixed price will give you the best price for sure. On that day.Tomorrow? Most energy forecasting is glorified meterology. Will it rain a week on Wednesday?  Will your pension go up or down? Most people don’t worry – it’s indexed to the FTSE.
Index prices for energy are the norm in most countries, even for domestic users. Fixed prices are an outdated concept in the UK today – they were born out of the 1990’s. The dawn of UK competition coincided with a collapse in commodity prices. Many end-users mistakenly connected competition with energy price falls. It was mere coincidence. Most countries now have utility competition: but in a world of rising commodity prices, competition is stillborn – < 2% switching rates in the US domestic supply market for example. US, European and Asian consumers can’t see the benefit of paying more to 3PIs to spend more. They are buying energy – not insurance. 
Circa 1992/2000 the only way to buy energy was on a fixed price contract.  Buyers wanted a guarantee of energy costs when comparing unknown suppliers against the default option of regional electricity or British Gas tariff rates. It wasn’t hard for suppliers to give lower costs in a falling market, and only the largest multi-million pound end-users were offered index prices that performed even better.
But today, the default option is the best option. No guarantees. But no buyer remorse. No second-guessing. The same prices as everyone else. And no extra fees.
In today’s market, what was once a small spend is now a big spend – fixed or index.  3PIs are moving down the value chain to target inexperienced smaller gas and electricity users because at today’s prices they make serious money from fixed contracts – the longer the better.  But they won’t make any money telling end-users to use a default option.  Even they haven’t figured out a way to make money by telling clients to do nothing.
NHO is advertiser supported.  Among those advertisers will be energy suppliers.  But they do not pay NHO any commission for your energy use.  We think we can make money out of No Hot Air. But not at the end-user’s expense.

Yet another paradigm shift….

Hang on a minute.  Aren’t we running out of gas?  I read it in the Daily Telegraph.  And the Independent. And the BBC

So where does this fit in:

Chesapeake Energy Corp, said the US is “entering an age of new gas abundance and we will have enough natural gas to meet all areas of new demand”.

“This is a game-changer, a paradigm shift,” McClendon said. “Shale gas makes the US the Saudi Arabia of natural gas.”

Or :

As major oil companies search for more oil to meet growing global demand, U.S. natural-gas companies face the opposite problem: what to do with all the gas they soon will be producing.

U.S. natural-gas production is soaring, thanks to high energy prices and new technologies that have unlocked reserves considered too difficult or expensive to tap in earlier era.

If the US is having a revolution in shale gas production, where is the UK/European/Russian or Middle East shale gas?  At the very least, this is going to have downward pressure on LNG prices here in Europe:

As some analysts have begun to toss around terms like “gas glut,” natural-gas futures have tumbled 9.2% in the past two weeks, and they have brought producers’ stocks down with them

if recent discoveries prove as successful as companies expect, the industry will need to promote natural gas for both power generation and transportation.

“It’s going to change the dynamics of the gas markets,” Mr. Papa said.

The new supplies could pose problems for importers of liquefied natural gas. U.S. LNG imports are down two-thirds from last year because higher prices in Asia and Europe have attracted shipments to those markets. If new U.S. production keeps prices comparatively low, LNG imports are unlikely to rise

And finally:  The key words here (from the WSJ link)are around the world…

But experts say the current situation is different. Instead of a single big discovery or a weather-related demand slump leading to a temporary rise in supplies, the industry has found a completely new resource — shale — that could last decades.

Shale — or dense rock formations that are common in many parts of the country and around the world– has long been known to hold natural gas. But production was impractical because the rock isn’t porous enough for the gas to flow.

Deja Vu Department

We could say we hate to say we told you so, but we’d be lying. We often use the acronym WTYS, FFS. (If you can’t figure FFS out, don’t ask.)

One thing we’ve been pushing from day one is to abandon outdated concepts – fixed prices, energy consultants, competition, efficiency is difficult, renewables are expensive etc., etc.

Key is how energy users on individual levels actually do react to energy prices – the old thinking was people will pay any price for energy and somehow energy reduction is for socialistic, French tree-huggers.  Maybe so, maybe not – a  businessperson’s first loyalty should be to his stock/stakeholders  who want to control bottom line costs. Even an MD who thinks Jeremy Clarkson is a girl’s blouse can figure that one out.

We first said on 8 May  that consumers, especially in the US, were starting to react to oil prices in ways that no one had thought possible, describing SUV’s as Irrational Vehicles. They’ll  never come back.  On 12 May we described how even in LA, drivers were parking the SUV and taking mass transit.

On 14 May, in a similar vein, we described how Alaskans, not know for their collectivist politics, reacting to a sudden electricity emergency and resultant price spike reduced demand by 40%.

On 10 June we described the Hummer’s Dead End. And on 21 July we said It’s Demand Stupid and pointed out the reasons for oil decline.

So it’s heartening to read today’s  Wall Street Journal

The U.S. economy is starting to figure out how to curb its legendary appetite for energy.

Consumers are buying fewer sport-utility vehicles and more energy-saving washing machines. Some trucking companies have rejiggered their engines to max out at lower speeds. Gridlock is easing in California. Americans drove 966 million fewer miles in May than they did a year earlier, a 3.7% decline, according to the Transportation Department.

Couldn’t have put it better ourselves.

Giant Retailers Look to Sun for Energy Savings – NYTimes.com

Link: Giant Retailers Look to Sun for Energy Savings – NYTimes.com.

US retailers take advantage of the free energy that falls out of the sky every day.

Sure some of this is because of government subsidies. But why should UK regulators and businesspeople  cling to 1990’s free market fantasies about energy subsidies when the inventors of the Washington Consensus have abandoned it?

Fascinating stuff here anyway such as If Wal-Mart eventually covered the roofs of all its Sam’s Club and Wal-Mart locations with solar panels, figures from the company show that the resulting solar acreage would roughly equal the size of Manhattan, an island of 23 square mile

One criticism of the story is that the economics for solar are improving every day as more capacity comes on line and advances in technology grow:

http://nohotair.typepad.co.uk/no_hot_air/2008/07/and-again.html

US retailers take advantage of the free energy that falls out of the sky every day. UK retailers are still waiting for planning permission?

Editorial – Energy Fictions – Editorial – NYTimes.com

Link: Editorial – Energy Fictions – Editorial – NYTimes.com.

Just to show that we here in the UK are not the only ones suffering from energy fictions, although ours are complicated  by the myth of competition being added to the mix.  What isn’t being added  to the mix is honest solutions like the ones here (highlighted below).

Instead UK energy consumers blame it on Europeans, or French or Russians, or China, or speculators, or fat cats or privatisation.   Everyone looks for blame –  no one takes it.

Here is the underlying reality: A nation that uses one-quarter of the world’s oil while possessing less than 3 percent of its reserves cannot drill its way to happiness at the pump, much less self-sufficiency. The only plausible strategy is to cut consumption while embarking on a serious program of alternative fuels and energy sources. This is a point the honest candidate should be making at every turn.

FT.com / Weekend columnists / Tim Harford – Never trust an economic forecast

Link: FT.com / Weekend columnists / Tim Harford – Never trust an economic forecast.

The excellent Tim Harford excels himself. One thing we agree with completely:  Why is it that people won’t take “I don’t really know” for an answer?

Perhaps the question is why do people want (or to be exact are willing to pay), for answers, even if they know they could/have a high probability/definitely will be wrong?

On our specific patch, it raises questions such as why do people want fixed price energy contracts? Similarly, why does the prudent type of energy buyer who wouldn’t be caught dead in a bookies or a gypsy’s tent insist on certainty for future prices ?

Two suppliers we were speaking to  this week said the same thing, without prompting:  Energy Buyers use energy consultants as  "someone to blame".

This is where economics goes into psychology, where the really interesting stuff has been happening this century, see Daniel Kahneman Richard Thaler, and Benoit Mandelbrot, with nods to Nicholas Taleb and his seminal book on this subject Fooled by Randomness.