Ofgem Energy Probe

Friday afternoon is the traditional time to bury news you'd like others to ignore, miss out on or just plain forget ever existed. 

Ofgem released this afternoon two pretty damning reports on both SME and domestic end user engagements with the energy market that Ofgem's Energy Probe already essentially cleared in early October. 

As a rule, Ofgem would issue any supporting research  and the report itself simultaneously.  Not when the reports (which Ofgem commissioned) show results completely at odds with Ofgem's usual rosy picture of how great the UK energy market is.  This time around Ofgem was wavering slightly, probably due to sustained public criticism from energywatch and the Parliamentary Business Affairs Committee and Public Accounts Committee.  We assume that Ofgem is also feeling the heat from any MP of any party on literally thousands of complaints over either price or service or both on energy suppliers.

But now we see why:  Ofgem's own reports show a complete breakdown of energy markets:

Few are both willing and able to seek out better deals proactively.  Some who attempt to do so
struggle to compare prices easily on price comparison sites. Price comparison may also be
complicated by issues such as length of contracts

Business customers were at best fairly satisfied with their energy supplier and often
disappointed.  They felt that energy companies deliver, at best, moderate standards of service
with no attempt to offer value-added services

This study suggests tighter regulation of TPIs and energy companies may be desirable.

The competitive energy market does not appear to have resulted in:- 
 companies seeking to deliver high levels of service
 small businesses comparing prices easily, and being confident that they are comparing on a
like for like basis

POSTSCRIPT
A few days after interviewing was completed the British Chamber of Commerce issued a report
claiming that energy suppliers were not giving businesses the same “fair and transparent”
service as that received by domestic users.
 
BCC argued that, compared to domestic users, businesses were “significantly more vulnerable”
to exploitation and unfair practice, partly because 
 
 domestic suppliers are required to publish their tariffs but there is no regulatory requirement
covering business suppliers
 
 domestic contracts allow people to switch every 28 days, but businesses have to sign up to
long-term deals.
 
David Frost, director general of the BCC said:-
 
“with the economy slowing and energy bills on the rise it is totally unacceptable that 
hard-pressed businesses are left so open to exploitation by energy suppliers.”
 
This study provides strong evidence in support of BCC‟s arguments.

Why didn't Ofgem release this research at the same time as the probe itself? Probably because the research would seem to contradict the conclusions.


Ofgem and Smart Meters

Ofgem has suddenly changed course 180 degrees and says that

Mr Buchanan agreed with the committee members that the best solution to billing problems now appeared to be smart meters. He said: “Ofgem has been an advocate for smart meters for three or four years and we are very hopeful that the Government will push on with this.”

Is this the same Ofgem that has seen no proof that Smart Metering provides efficiency (2007)?  And thinks that it will cost an average of £340 per meter to implement (2007), while Italy provides it for less than €90, Ontario for less than CDN$250, or California for less than US$200? 

Is this the same Ofgem and BERR who think that SME's should get Smart Meters in exactly the same time frame as domestics i.e. at least 10 years but less than 20 years?  As opposed to Ireland with 100% by 2012 or France with 100% by 2015?

No this is the same Ofgem which all of a sudden is in danger of being disbanded entirely. 

Grim up north

We've had links to exotic locations worldwide, but we wanted to gauge what impact Ed Miliband is having as Minister for Energy and Climate Change.  The Guardian, recently stated that he was pissing people off as we noted last week, but then this week in the pre-Budget statement:  nothing.

Still, in the by one's enemies do we know him department, the only thing we can really find is from Bernard Ingham.  Remember him?  Probably not.  He was once Thatcher's Press Secretary now reduced to sniping from that cutting edge and heavily influential publication The Yorkshire Post.  But as we see from the ridiculous sniping over the Pre Budget Statement,  for both main parties, and the lazy journos who cover them, it's back to the future.  Outside the UK, Citibank is effectively nationalised,  the EU proposes €250 billion for a recovery package and China unveils another one.  But here it's lets do the time warp again:  Deficit spending is the enemy of civilisation as we know it. On one hand we have a government  that thinks a 2.5% cut in VAT will get people back in the shops, although they are already immune to offers of ten to twenty times that amount.  Are you going to buy a new car because you can save £300 on it?  Do they know anything about real life?  But the next day the Tories have apoplexy over a possible 1% (shock! horror!) rise in VAT. 

So perhaps people like Ingham will become listened to again.  Dominic Lawson, who  screwed things up big time as Chancellor for La Thatcher is pushing his Climate Change is a big con and the Nobel Prize commitee are a bunch of communists book, and his old pal Ingham is generating mucho wind energy, rather surprising when of course he doesn't believe in it.

Is our wild, unspoilt countryside in safe hands? You must be joking. Why, this very organisation – this so-called Environment Agency – is actually proposing to build wind "farms" down some of our lovely
river valleys.

Contrary to what it seems to think, the turbines won't power a thing if the wind doesn't blow. They are also by common consent among those who have studied their economics the most expensive and unreliable option for reducing carbon emissions. What is more, we consumers foot the bill for this waste.

What is this problem with the right and wind?  No one is proposing wind anywhere except miles offshore these days, which is a rather windy place and a long way from offending the delicate eyes of people who otherwise seem to think we can solve the energy crisis by building nuclear plants for far more money in a far longer time scale.

Save the economy, and the Planet

Over here, we don't seem to be getting this, but this New York Times editorial says it all.  Remember as we see the ridiculous time warp politics of the UK take us further down the crapper.  There is hope out there.  Not just here, or at least yet. Once Obama is in full operation we hope he can lead the world, or at least our little corner of it.  Hopefully,  the UK will not take kindly to being out greened by the US.  We've had eight years of slavishly following a moron.  Can we have change here now?

Environment ministers preparing for next week’s talks on global warming in Poznan, Poland, have been sounding decidedly downbeat. From Paris to Beijing, the refrain is the same: This is no time to pursue ambitious plans to stop global warming. We can’t deal with a financial crisis and reduce emissions at the same time.

There is a very different message coming from this country. President-elect Barack Obama is arguing that there is no better time than the present to invest heavily in clean energy technologies. Such investment, he says, would confront the threat of unchecked warming, reduce the country’s dependence on foreign oil and help revive the American economy.

Call it what you will: a climate policy wrapped inside an energy policy wrapped inside an economic policy. By any name, it is a radical shift from the defeatism and denial that marked President Bush’s eight years in office. If Mr. Obama follows through on his commitments, this country will at last provide the global leadership that is essential for addressing the dangers of climate change.

In his first six months in office, Mr. Bush reneged on a campaign promise to regulate carbon dioxide and walked away from the Kyoto Protocol, a modest first effort to control global greenhouse gas emissions.

Still two months from the White House, Mr. Obama has convincingly reaffirmed his main climate related promises.

One is to impose (Congress willing) a mandatory cap on emissions aimed at reducing America’s output of greenhouses gas by 80 percent by midcentury. According to mainstream scientists, that is the minimum necessary to stabilize atmospheric concentrations of carbon dioxide and avoid the worst consequences of global warming. Mr. Obama’s second pledge is to invest $15 billion a year to build a clean economy that cuts fuel costs and creates thousands of green jobs. That includes investments in solar power, wind power, clean coal (plants capable of capturing and storing carbon emissions) and, as part of any bailout, helping Detroit retool assembly lines to build a new generation of more fuel-efficient vehicles.

Mr. Obama has surrounded himself with like-minded people who have spent years immersed in the complexities of energy policy.

His transition chief, John Podesta, was an early advocate of assisting the automakers and of finding low-carbon alternatives to gasoline. Peter Orszag, his choice to run the Office of Management and Budget (where environmental initiatives went to die during the Bush years) is an expert on cap-and-trade programs to limit industrial emissions of greenhouse gases.

Success is not guaranteed. Last year, a far more modest climate-change bill fell well short of a simple majority in the Senate. At least on the surface, it seems counterintuitive to impose new regulations (and, in the short term anyway, higher energy costs) on a struggling economy. Mr. Obama will need all his oratorical power to make the opposite case.

The historical landscape from Richard Nixon onward is littered with bold and unfulfilled promises to wean the nation from fossil fuels, especially imported oil. What is different now is the need to deal with the clear and present threat of global warming. What is also different is that the country has elected a president who believes that meeting the challenge of climate change is essential to the health of the planet and to America’s economic future.

Staying in the black and blue

The head of the Commons Business Committee, Peter Luff, launches another broadside at Ofgem over domestic (and a surprising amount of SME) customers being over charged on the amount taken out each month for energy.

This comes down to slightly more than our standard response of smart metering solves that issue.  Which,  evidently, it does.

But if we understood volume and time of use about energy, the UK can also introduce paying for energy when you use it. What is so difficult about that?  Not paying for energy on actual use is a British peculiarity like other things foreigners think real weird like single sex education, three prong plugs and getting publicly drunk. Why is paying more for energy in January unpalatable? Or on the other hand, why should consumers object to paying not very much in the summer?  In the utility world,  the UK is marked by two things:  no monthly reads and fixed monthly costs.  Time to break the connection. 

  One can't complain about suppliers taking more out in a DD if there is no way of measuring actual use.  But many people allegedly prefer a fixed amount (which of course isn't fixed), especially wailing when it goes up.  We certainly wouldn't hear complaints if the price went down.  It's time to act like adults.  It gets cold in January:  so the response shouldn't be paying for that gas months after, or before, you use it.  In January one prepares in advance for it, or turns down the thermostat and flicks the light switch.  Isn't that a bit more responsible?  A Tory like Peter Luff should like that.  But before we can get to there, we need the level playing field of proper  metering combined with a default price.  We need to be un-confused.  And we have to abandon outdated concepts.

When, not how much

Without getting too technical about it, which we can but thankfully won't, one basic most end-users don't understand in energy purchasing is that the when is more important in pricing than the how much:

A discotheque may use twice as much electricity running all those lights, as an office, but pays half the price. Supply and demand: Power is cheap at night, especially after sane people go to bed.

An ice cream factory uses half the amount that a bakery does, yet the bakery pays twice as much. The bakery's December ovens compete for gas with millions of domestic users, and they are switched off in the summer.  The bakery rate includes lower summer gas, but at the freezers and mixers they pay only for summer gas.

A key rule of UK energy pricing for the long term contracts that everyone is used to, is that prices are based on a curve that follows domestic demand assumptions, in turn basically weather related.  Prices change from day to day, but the shape of the curve remains essentially the same.  So November should be higher than November, and January highest of all.

But not in the case of this season.  Taking gas prices on day ahead November is now tracking at slightly less than the October outturn. And December is looking pretty good, especially considering that the prices reflect industrial shutdowns the second half of the month.  January is when we normally expect to see reality intrude on wholesale markets anyway, so unless it snows from now until New Year's Eve,  January may be lower still.  We may see October as the more expensive month of the entire winter, which is historically real weird as us energy economists say.

Back in July, January gas was over 115 and today is 65 and falling.  The difference between a one year fixed price of 90/95 that was offered most of the summer and the index cost has been over 40% so far.  What would be worse: To be on an index and risk an outurn that is 40% worse than a fixed price or to be fixed and be guaranteed it?

Tories embrace smart meters

We don't flatter ourselves that the recent Tory conversion to smart metering is a sincere form of imitation.  In fact it makes us more likely to think that if they like the idea there may be something horribly wrong that we've missed.

Struggling homeowners would have their fuel bills cut by hundreds of pounds under radical plans unveiled by the Tories.

David Cameron wants to make it illegal for energy companies to impose higher charges on customers with pre-payment meters.

Instead, they would have to install state-of- the-art 'smart meters' in every home. Experts say these meters encourage lower energy use because they show how much it is costing to leave the lights on or keep TVs, DVD players and other devices on standby. The Tories said it could save families as much as £300 a year.

Smart metering would among other things,  remove the confusion marketing that energy marketing has degenerated into.  Simple Time of Use tariffs would enable consumers to make decisions not on the essential irrelevance of who supplies energy, but on how much they use and can they save anything by either cutting use or timeshifting it.  The cheapest kilowatt is the one you don't use.

Actually this may be a case of the Tories proposing something that the government is already considering, in  order to later accuse them of stealing the idea.  Either way, this news and the revelation from The Guardian re Ed Miliband recently that "Business leaders are telling us they can't remember the last time a secretary of state pissed off their lot so quickly,"  can only bode well.

On the subject of PPM meters and smart meters in general, it's worth noting that it in Northern Ireland Phoenix Natural Gas rates for standard tariff or Pay As You Go meters are virtually identical, and actually lower for small users.  Since Phoenix rose from the ashes of what little mains gas industry Ulster ever had relatively recently, these costs reflect 21st century meter infrastructure, further confusing the issue of why do PAYG/PPM on mainland Britain carry such a premium?

Why the Green Gloom?

Disturbing, but not in the least surprising news from an FT poll:

About 30 per cent of Britons thought efforts to combat global warming would reduce the number of jobs available, compared with 24 per cent who said it would increase job numbers.
The British gloom will come as a disappointment to the UK government, which is preparing a “green industrial strategy” to boost manufacturing activity through focusing on environmental goods and services. Ministers have estimated that seeking to improve the country’s environmental performance, and generate 15 per cent of energy from renewables by 2020, would generate 160,000 new jobs.

We say that apart from the natural British (English) tendency to almost enjoy a disaster instead of expending energy on providing solutions,  this is a result of simply not knowing too much about energy except the price is going up.  The cheapest kilowatts are those that are not used, but since few business or domestic consumers have any idea of how much energy they use or what they pay for, highlighting areas for improvement is either difficult or just too much trouble: One example is how SME's have a lower switching rate than domestic customers.  And as the Public Accounts committee highlighted last week,  almost a third of those who do switch actually end up paying more!

There is a solution, but one which, until recently, the UK government has been not simply going slow on but actually obstructing:  our old favourite Smart Metering, which would also allow the solution of index pricing.  Both of these would make energy far more transparent than the current confusion which serves no one, although possibly suppliers have yet to be brought to that conclusion.

A crisis is a terrible thing to waste. We could just muddle through, but elsewhere, especially in the US, current events are seen as an opportunity to create, among other things, a wholesale decarbonising of the economy.  We could muddle through.  But the new paradigm of investment and spending, if it is not wasted can also give the UK hope for the future.  Smart Metering, apart from making consumers aware can also solve a number of other problems:

Jobs:  an accelerated SM program could create thousands of installer and meter manufacturing jobs
Fuel Poverty: SM will allow new thinking on energy pricing that will change the current mess where the poorest and those in fuel debt, sink deeper into a hole because the costs of prepay meters are inordinately high.  This will naturally impact government targets on Child  Poverty.
Carbon Reduction:  Less Energy is less Carbon
Finally, lower energy costs will  impact the wider economy.  Energy is analogous to taxes in that everyone pays for both.  Lower energy costs have an impact equal to lower taxes in the wider economy, but with the virtue of not being funded by government.

Does the public have the imagination to see this?  Judging by the poll, not yet. But government can create some leadership that may yet achieve it.

The Confusopoly

When the Commons Public Accounts Committee entitles a report on regulation "Protecting Consumers?" Ofgem should be getting nervous.  The question mark in the title shows for the second time this year that Parliament's patience with Ofgem's combination of excuses and inaction is wearing thin.

An important part of the displeasure is over the failure of the market. Ofgem has confused choice of supplier with competition for some years now.  Ofgem's continual trumpeting of "Choice, Choice" made them sound like a throwback to Majorism at the best of times which was when prices were coming down.  Energy prices declined for nothing to do with competition of course.  Bad luck for Ofgem that prices are rising for nothing to do with competition either, but at a time when Reaganesque solutions appear ridiculous.

The Committee Chairman referred to a "confusopoly" which is a compound of monopoly and a complex pricing structure.

The Public Accounts Committee seems impatient with Ofgem's inablility, and seeming unwillingness, to act. The PAC noted, as we have, that a market where a quarter of electricity consumers actually switched to a more expensive rate is more a sign of confusion marketing than a reliable market.

They also recommended that suppliers are to offer the lowest rate to customers, a hard habit to break when there are a dozen or more tariffs per supplier on the average switching site.

High energy prices are unfortunate. Where they are made worse is deliberate confusion marketing strategies, lack of reliable volume or time of use data,  third-party introducers with hidden agendas and all users being discriminated against by being denied access to wholesale prices that are readily available to larger users. Ofgem is being told to shape up, but is it too late?

Predicting prices, fulfilling disaster.

It remains to be seen if the results of both SME and domestic customers fixing energy costs this year will be ironic or tragic.

 

Scottish and Southern, regularly one of the lower cost domestic suppliers, now predict domestic energy price reductions in the New Year. 

 

NHO dependably recommends index pricing to reflect changes in wholesale markets. Our thinking is that markets are sometimes irrational, but are never consistently irrational.

 

Could a retail market that pushes promotes stability in pricing as a way of ensuring low prices actually have delivered the opposite?  Did people fulfil the tragedy they sought to avert?  The answer is probably yes.In which case, how did so many people act counter to their best interests?

 

First a reminder of the numbers.  February peak power was 12.9 a kWh a month ago and had been even higher over the summer: Today it’s 9.4.

November is even more dramatic: it was as high as 15 and now it’s 8.5.

Gas for January, the most expensive month was over 110 pence per therm during July, with a one year commodity only cost of 99. Today, January is below 70 and one year is nearing 60. Day ahead is averaging 60 for November. November is often the most expensive month for gas and barring major accidents or very severe cold snaps, we should see January end up being 50 at best.

 

The end result: fixed prices for power give suppliers 40% more than they can buy it for between each other on wholesale markets.  Floating prices for gas look like they can end up being well over 50% cheaper.

 

This isn’t the place to discuss how these numbers got here. The signs pointed to a correction pushing prices to the edge way before the financial crisis pushed them over it.

 

This is a good time to discuss why they got here:

 

  • Without knowledge of energy issues, including such basics as when, how and how much gas and power is used, consumers operate in the dark.
  • That made people liable to act on scare stories in the press.  Tell people who don’t know the issues and don’t have any benchmarks that gas or electricity or oil is running out and they usually pay up to secure supplies.
  • The myth of competition, a fantasy that markets provide efficient long term outcomes made things worse.  These fallacies have been pushed by a self-reinforcing cabal of regulators, third party introducers and consultants  who have a vested interest in keeping their fees and/or jobs.

 Advice to fix has been a disaster for both domestic and commercial end-users.  But a very nice earner for introducers and switching sites. There’s been much public anger over bonuses in the financial arena. Similar rage should be directed towards those who profited from fixed prices and those who failed to do anything about changing the system that prolongs them by keeping consumers in the dark.