Is Forecasting Dead?

An Economist leader discusses how some companies have given up on issuing earning forecasts:

Citing the chaos of the global downturn, a growing number of companies, including Unilever, an Anglo-Dutch consumer-goods firm, Costco, a big American retailer, and Union Pacific, one of America’s big railroads, have decided not to give annual earnings estimates for 2009

Issuing such targets is pointless and dangerous, critics claim. They argue that, with the banking industry catatonic and consumers pulling their purse strings ever tighter, the world is so topsy-turvy that any financial goal will be out of date as soon as the ink dries on the press release.

Perhaps the answer lies in new ways of forecasting:

A few forward-thinking firms can provide inspiration. Hugh Courtney, a professor at the University of Maryland’s Robert H. Smith School of Business, thinks more companies should be using “scenario planning” alongside their financial models, which do not produce a large enough spread of possible outcomes to capture the flavour of today’s uncertainties. Sten Daugaard, the finance chief of Lego, a Danish toymaker, says his firm generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it.

The same approach is needed for energy. UK Gas and electricity, following the lead of oil, are among the most volatile commodities going. The price today is based on today's news. Tomorrow?  The news changes, sometimes fast, sometimes slow, sometimes it does actually just sit there. NHO has always recommended using Day Ahead Gas and Electricity Index prices, where final commodity cost each month is derived from average wholesale prices that change daily. Commodity costs are up to 95% of a delivered price and transportation and margin costs are the only things that are mostly fixed. If margin increased from 2% to 3%, or transport went up even 10%, the overall price outturn is barely changed.

But while an increasing amount of energy buyers are happy with that approach, FD's or Account Departments like to have figures to put in their spreadsheets. FD's have a right to numbers, but they are adult enough to know that as Voltaire said "Doubt is uncomfortable, certainty is ridiculous". The solution could be scenario planning based on dynamic forecasting, where prices for quarters, seasons and years would be provided- and inevitably change – on a regular basis.  That may be uncomfortable for less nimble companies, but the old way of fixed prices has gone – and it won't be back.

Smart Metering enable users to know exactly what they are using on a daily and monthly basis. Today, problems arise in that Smart Metering still runs up against stupid tariffs based on the old paradigms of meter reads so infrequent and random that suppliers guess what movements prices would take. When presented with risk, they inevitably erred on the side of caution and we had the old model of utility pricing. Things aren't so sure anywhere, anyhow, anymore.  But they will be far cheaper, and companies need to cut every cost going to survive.  Floating price insecurity, or the security of having to lay someone off to pay a fixed price energy bill.  The choice may be yours.  It may be your job.

If end users seek certainty, someone will take their money. We aim to provide the numbers and how to interpret them. The rest is up to our readers. We're not in the crystal ball business. Or any type of cross the palm with silver business.

No end user of any size is going to have any impact at all on energy prices, apart from tiny levels of margin, which  depends mostly on the credit score anyway. The common fallacy that volume means anything in energy is not believed by most people. That includes energy consultants, although they have a vested interest in saying otherwise. The commodity cost is the same for a chip shop, data centre, bakery, car plant, steel mill or even a power station.

All end-users can do is to be aware. That's where we try to educate buyers and users alike. Forecasts will always be necessary. Smart Metering. Smart Prices. Smart Forecasting. That's the core NHO product, coming to an inbox near you soon.

The value of LCFE Energy Consultancy (February 2009)

Could a consultant add any value to gas prices? Yet again, for February, the opposite is true. All prices here are for commodity only, excluding delivery and margin.

The default option of buying gas on the day ahead index will mean (assuming Saturday 28 February isn't marked by anything drastic) a gas price just under 49 pence per therm. That was the default option:  no action needed on the end user's part, not spending time benchmarking consultant performance and not suffering second thoughts. And not sharing the value that should be between the supplier and end-user either: No fee, no commission, no "administration" fee, nothing.

Let's assume the consultant didn't (or couldn't) convince the buyer to go fixed price. Fixed price for the entire year from October 2008 in July would have been 98, 90 in September, or 79 in October. But many consultants say they provide value by buying according to the market. The easy way of doing that is by waiting. For February the average price during January was 57.80. Assume that the consultant was skillful (their spin) or lucky (what actually happened). It would have been impossible to better the lowest available February price of 54.7 (on either 2 or 14 January).  Let's be clear here: February 09 would have been physically impossible to buy in advance of 1 February at less than the Day Ahead Index. Using even LCFE Consultants (Luckiest Consultant on the Face of the Earth) would have resulted in a best case scenario of an extra 11.6% cost. Not including fees,time wasted being chased by them on the phone, reading endless complex reports and generally suffering the feeling they don't know that much more about energy than their customers.

Some consultants will have the gall to say that buying February when they did, resulted in savings against the fixed price, aren't they clever and here's the invoice.

What they won't say is that there is any option to do absolutely nothing. No matter how smooth the sales patter or credulous the buyer: No one pays someone for very long to tell them to do nothing.

We'll repeat this every month from now on. Some months, they will be sure to live up to their name. How many? 

Deficient Market Theory

Efficient Market Theory states that markets are "informationally efficient", or that prices of assets, stock, commodities etc already reflect all known information.

EMF has been one of the key ideogical constructs of the Chicago School which asserts the primacy of rational thought, efficient markets and the entire neo-conservative construct.

Economic trends of the past decade or so have tended to favour behavioral economics: Again this gives us a chance to say all hail to people like Daniel Kahneman and Barry Schwartz.

Behavioral economists say that removing choice and replacing them with considered nudges which replaces anxiety with informed choice.

Sadly, as we've noted before the UK energy establishment starting with BERR and Ofgem still think it's 1989.  Not only has the impact of the financial fiasco passed them by, even New Labour is a bit alien to them; in the world of Ofgem things haven't changed since the Cones Hotline. We saw this again last October as Ofgem begrudgingly published the Energy Supply Probe which stated the usual claptrap about markets working to benefit the consumer etc. 

It's becoming increasingly hard for even Ofgem to muster the old enthusiasm about markets working simply because there is a market. Ofgem has tried in the past to represent independent developments such as payment by DD or Internet utility accounts as some type of proof of the value of markets, but they are increasingly resorting to simply ignoring reality.

That reality as revealed in a recent Ofgem document is at odds with the rosy view.

  • Fifty per cent of gas consumers have never left British Gas/Centrica. If Tesco, Ford or even Sky had 50% market share, questions would be asked.
  • Only 18% have switched more than once
  • 30% of gas consumers moved on the advice of direct selling also known as doorstep selling although it's just as likely to be in a supermarket, motorway service area or shopping mall.  A whopping 85% of those who switched don't investigate any other deals. Even considering how arcane gas bills are, this strikes us as gullibilty run rampant. Ofgem, or suppliers can't be held entirely responsible for mass credulousness, no matter how screwed up metering and bills are.
  • But the killer statistic is that 48% of consumers in gas (42% in electricity) either waste their time and achieve zero savings or a third of them "inadvertently" sign up for a worse deal!

An efficient market would supply the necessary information and ongoing data to make informed decisions. Fifty per cent don't even try, many because of inertia, but most because they don't have access to data, which Ofgem and BERR have been going slow on for years thanks to the glacial roll out of smart metering. The fact that the lack of information actually causes almost half of switchers to waste their time (which is also money last time we looked) or actively cost them money is what:  A travesty? Shambles? Disgrace?

Fuelish Forecasting…

NHO says that the best price is the day ahead index price. Energy buyers can't worry about because they can't possibly influence it short of switching off en masse.  Come to think of it maybe that explains a lot.

Since we already recommend the default option, we don't really obsess about pricing that much, and we don't even mention it that much.  But this month a couple of things of note have happened.

February 2 is Groundhog Day. Punxatawnie Pete did see his shadow by the way, so allegedly there will be six more weeks of winter, at least in Pennsylvania.  Here in the UK it was the heaviest snow in years.

Gas pricing, and as a result power pricing, when priced months ahead always likes to look on the darker side of life. As we stated on our post, After the Blizzard, the Deluge on February 4, once the worst weather happens, then the market panics, and this explains this months collapse.

On February 2 one could look out the window, take the pessimistic view and buy on the day's news and shafted yourself by buying gas at 62 pence for March. (BTW, we know someone who did this, and congratualted themselves by pointing out to the client the saving from the 90 pence plus for March offered last summer).

And today, it's 34 pence and going south.  Day ahead went from 67 to 34.  February day ahead should end up slightly below 50 pence, which is 50% less than a fixed price last summer. It's easy to blame the Financial Fiasco and collapsing industrial demand is a factor, but let no one convince anyone that last summer's forward prices would have actually been delivered.  The fundamentals were never going to pass, and now fundamentals such as supply and demand combined with falling oil are meeting the reality of winter coming to an end.  If it was not for the coldest winter in 16 years, we would have seen the price collapse at the traditional New Year's Eve rout of the gas markets.

 March would only be helped by somthing drastic like another Rough Storage going down or such like, but with LNG coming from as far afield as Trinidad, prices have only one way to go.

It will be nice to see gas under a penny per kWh (29.3 pence per therm), however short it may be. It's too early to give summer predicitions yet, but single digit prices are not completely out of the question.

Running out of gas?

One sure thing everyone thinks they know about UK energy is how we're running out of gas, and your children better start learning Russian if they want to keep warm.

But there is a big difference between a gradual depletion of North Sea gas and grannies freezing in the dark. Apart from the international gas glut,where does this scoop from the Shetland News (FFS) fit in?

French oil giant Total announced last Friday they were to invest £2 billion in a pipeline to bring gas ashore to Sullom Voe.
Long term, all the other prospective gas fields to the west of Shetland might well feed into this gas pipeline as well, so we certainly are looking at 20 to 30 years of additional business," he said.

It would appear that while North Sea gas is depleting, new production from west of Shetland has yet to be fully factored in. No one officially counts it, but it could be 20% of UK (or Scotland's to be exact) reserves. As the man says:

No company invests in a £500 million plant if they don't expect it to be in use for a good few years.

Again, we're running out of North Sea Gas. And even that can be partially replaced by within UK sources. Tell your gran to take off the extra cardie.

International Gas part two…

Following on from the articles of the world wide gas glut, yesterday Siberia, today Nigeria.

Plans for a gas pipeline between Nigeria and Algeria have been around for years, but it's beginning to make more sense with even Gazprom getting in on the act allegedly.

Among many problems Nigeria has a major problem with gas flaring, where natural gas produced via oil production is simply flared with nowhere to go.  Even at 30 pence per therm, this strikes us as one hell of a waste with 24 billion cubic metres of gas flared off annually, the highest figure in the world and visible from space.  There is a World Bank program to address flaring, as apart from anything else, flaring is a massive source of CO2.

Nigeria flares double the gas of anyone else in the world, akin to burning billions of dollars while poisoning the atmosphere on a planetary scale.  So it makes sense that:

bilateral talks on how to put finishing touches to the Memorandum of Understanding earlier entered by both countries on the 4,000-kilometre Trans-Saharan gas pipeline project, estimated at $12 billion, and expected to supply gas to Europe through the Sahara Desert.
Barkindo and Meziane  contended that with the huge demand for gas in Europe and the quest to diversify supply, there was a guarantee that demand for gas from Nigeria would continue for a long time, possibly for 40 years.
Barkindo said  financing of the Trans-Saharan gas pipeline would not be jeopardised by the global recession, as the project has attracted  sustained interest of financiers, in spite of the meltdown

Algeria already has substantial gas infrastructure of it's own and supplies much of the UK's LNG already.  Algeria is also connected by existing pipeline to Italy and Spain. Something to think about when a consultant starts warning about gas shortages.

Uncertainty in the supply of gas could push up costs and affect domestic energy bills in the long-term, according to an analyst.

Ian Parrett, of Inenco, says prices could be pushed up when the economy starts to recover

Quite apart from relying on an energy consultant for economic forecasting,  Inenco has a vested interest in sowing doubt about gas prices, as the longer term the price, the higher their fee.  What exactly our vested interest is in telling everyone to not worry about gas prices past the front month, we haven't figured out yet.  But, unlike a consultant, it doesn't appear to involve any money changing hands.



Long Term Evolution

Moving away, or aside from, energy, the Mobile World Congress in Barcelona is the location for mobile product launch announcements, and this year's big news is from Verizon Wireless, the US operator with a large Vodafone stake. Remembering that Europe and Asia are generally ahead of the fast catching up US in mobiles, Verizon's announcement is promising news:

LTE systems are said to allow for peak download rates of up to 100Mbit/s, compared to the 7.2Mbit/s speeds of most current 3G systems.

According to reports, Verizon hopes to begin testing the new network later this year in a pair of test markets. By 2010 the company is reportedly hoping to expand its reach to as many as 30 markets.

What does this mean for long suffering energy users, and more to the point, what does it mean for energy suppliers? 

LTE means ubiquitous wireless access, i.e. anytime, anywhere, always on, zero redundant voice, data and M2M communication. Machine to Machine communication means we don't have to wait for ten years for Smart Metering. Bi-directional SM will still be a good nice to have, but if an energy meter is just one more node on a data network, end users have the functionality of automatic meter reads as a given, not a special gift of suppliers or regulators. Utility guys get hung up on delivery and drag projects out for decades. IT guys say "Just do it". And they do, or at least they will. By 2015, which is not so far away as we always point out, all energy use will be metered automatically. If it's metered automatically it can be billed automatically. And the automatic default price for most people will be wholesale prices plus transit fees plus margin, a world away from today's confusopoly pricing. 

The challenge will be interpreting that data, not how it gets delivered. We'll go from zero knowledge to total knowledge and without interpretation much data will get wasted. Once we start seeing electrons and molecules as just so many bits or data memes , data as well as potentially harmful energy commodities, traditional utility business models will be toast. National Grid will still transport energy.  Total, BP, Centrica will still still pull gas out of the sea and EDF and npower and Drax will still generate electricity, among others.  But the supplier:  Why not the likes of O2, or Sky or Google?

Sakhalin LNG

What could it mean to a UK energy user that 9000 miles away in Siberia the Sakhalin LNG plant has just been opened?  A very big deal actually, big enough to ship Prince Andrew out there for the festivities, although he is coming back.

One thing everybody thinks they know about UK energy is that we're running out of gas. We're actually running out of North Sea gas. Worlwide the words gas and glut come to mind: 13% of the UK's gas is now imported via LNG from every possible corner of the planet. We compete for that gas on the world market, but that is nowhere near as dire a scenario as some make out. Five years back, everyone was wanting to build LNG gasification export and regas import capacity to take advantage of a looming shortage. But the shortage was built on strong North American demand which has evaporated in the past two years thanks to the advances in on-shore shale gas recovery. Those advances will be coming to Europe, specifically Sweden and Austria over the next few years BTW.  Add in the depresssed demand worldwide for energy and LNG prices have dived.  The only thing that could make gas prices worse would be if the world's largest (and least price sensitive) buyers in Japan and Korea now had the choice of a supply on their doorstep. They do now:

Speaking at the event, Medvedev said the project was of great strategic
importance to Russia and other countries, and would account for up to 5% of
global LNG supplies once the plant reaches full capacity in 2010.
     "This strengthens Russia's position as a major player on the energy
market. And we will not hide the fact that we are very pleased with this," he
     Aso said the project would help diversify suppliers in the Asia-Pacific
region and further strengthen relations with Russia.
     Supplies from Sakhalin 2 will make up some 7% of Japan's annual LNG
imports, he said.

     "To have [an LNG plant] in such proximity has been Japan's dream of many
years," he said. "Russia is becoming a constructive partner in the
Asia-Pacific region."

Tokyo Electric Power (TEPCO) and Korea Gas Corporation (KOGAS) import much of their gas from as far afield as Qatar, which is the big terminal for exports to Europe as well. So if Qatar were to lose chunks of second big customer, the last thing that will happen is for the price to go up to Europe. TEPCO and KOGAS have also been much more interested in security of supply than price, so the price of cargoes will go lower still. UK summer gas is now in the thirties, as opposed over 90 last July and 50+ year on year.  But US summer gas is half of the UK price.  That arbitrage will disappear  – and to the UK's benefit.

What do we believe in…

It's sometimes hard to explain NHO to people. What is our product, they ask. Which is a fair question. We are certain what it is not: It is not certainty. But then we don't charge for anything.  Doesn't this make us particularly valuable?  Energy advisers sell advice.We don't have any (certain) advice, so we would certainly be crooks if we charged anything more for it than short term rent of eyeballs. We think that 95% of UK energy buyers don't need energy consultants. Don't fall off the chair here, but 100% of energy consultants disagree.  We think that energy buyers should either demand smart metering, install it themselves or walk away from their supplier,  no matter what level of usage. Then ask for smart buying to match smart metering: dynamic prices indexed to wholesale markets. Energy consultants or Third Party Introducers won't offer you index pricing, which is the new default option. They figure how long would end users pay to get told to do nothing. While we can relate to that, we also like to sleep nights.

We don't sell anything. We give a lot of advice, sometimes perhaps at much length. We set out information, posit questions and dole out advice. The rest is up to you. If you're the type of energy buyer so unsure of themselves that they want to pay someone for advice, we just say be aware of the cost. And we think the best advice is the cheapest advice and the best advice is that there is no certainty in energy prices, and what is so awful about that.

One day maybe we'll be invited on Bloomberg or CNBC. And we hope that we'll be just as convincing to our audience and confusing to the journalists as our hero, Nassim Nicholas Taleb.  This story from the NYT on his recent CNBC appearance  is a classic.

Sensing the thickening gloom, Mr. Griffeth pivoted away to Mr. Taleb and said, “You’re not as bearish as Nouriel, are you?” Well yes, as a matter of fact he was. “We have the same people in charge, those who did not see the crisis coming,” he said.

In studio, Dennis Kneale of CNBC broke in and said, “Let’s get back to the real purpose of doing this, because we know the forecast is dark and continuing dark,” and then went on to fish for one metric, any measurement, that suggested the economy was “turning the corner.”

His guests did not play ball, and later they looked slightly aghast when asked what they would invest in and what was in their portfolios

On any other day, the bottom is synonymous with “buying opportunity” on cable financial news, but not when you’re trapped on the Titanic.

The news media in this country are often accused of being contrary and pessimistic, but rarely is that the case. Amid carnage, economic or otherwise, reporters are trained to look for “glimmers of hope,” “signs that the worst is behind us” and “miraculous tales of survival,” especially those that involve a baby….somehow making it through a hurricane, tornado or mudslide.

….The problem for financial reporters (and consumers) is compounded by the failure of some of the more convenient tropes of business reporting. Many of the financial sectors’ rock stars have turned out to be the biggest fools of all. Even “Wall Street” itself is no longer a synonym for financial wisdom.

The headline that you will never hear is ‘The market was down 110 points, a random fluctuation in a very complex system,’ ” said Eric Schurenberg, the former managing editor of Money magazine ….“No one has ever known what was going to happen, but there is this temptation to act like you did. But that fantasy has been exploded.”

Certainty about energy prices is a fantasy that will inevitably disappoint. The rare time it works is simply luck not skill. But who would ever pay for luck?

How big a number is that?

This is exactly the bogus type of story that both lazy journalists or Ofgem loves,while actually doing zilch for consumers:. From the Times Gas customers victory.

Ofgem, the industry regulator, today said it had completed an investigation into npower’s changes to gas tariffs in 2007 and found that the energy company had not properly informed customers about the changes. This resulted in many households on low consumption losing out. Ofgem has now ordered npower to pay a total of £1.2 million in compensation to the 200,000 customers who were affected.

The decision marks a victory for Times Money’s eight-month campaign to highlight the excess charges which resulted from the npower’s failure of communication over the tariff changes.

Wow!  Give them an MBE!  What a victory, sleep soundly tonight, knowing that the combined forces of Ofgem and The Times are fighting for you!

200,000 out of 22 million gas customers have just seen a reduction of £6! The rest of them are screwed, but I guess that's old news that's not worth printing anymore.  At least as long as The Times takes advertising from uswitch, The Energy Shop and Money Supermarket.

Anyone who doesn't have to take off their shoes to do maths knows that £1.2 million is a completely inconsequential number.  Even Ofgem and The Times can't be that naive.