Wednesday 6 July 2011

Watching The Lights Go Out part 94, cont

Some people feel their energy suppliers are ripping them off. Some resent the fact they are mostly owned by foreign companies. The government wants them to invest over £200 bn to order – but is happy to hunt with the hounds. Fair game ? They are big boys, for sure.

But there is a real problem, for the government and for all of us, with the long-running sport of treating the gas & electricity companies as punchbags. And for conducting public debate at such a depressingly low level. From the Telegraph, with a little fisking:

"The companies have paid more for their gas and electricity than spot prices because they buy on long-term contracts to 'smooth' volatility in a process known as hedging."

Yes yes yes, of course they do: they are in a margin business, and they can't switch us off on a cold day when prices are spiking, or pass through the cost of the spikes to us. It’s not unusual for there to be a hedging premium for natural shorts, when spot prices are volatile. Not everyone can afford to be at the mercy of spikes in order to be able to benefit from the average: “the market can stay irrational longer than you can stay solvent”, in the words of the prophet.

"Tim Yeo, chairman of the energy select committee, said he intends to question companies about their varying wholesale prices when they next appear before MPs."

Me, I’d be raising questions if they had all paid the same wholesale price !

" 'It reveals very different input prices and that some are much smarter at buying energy than others. … It also exposes the extent to which perhaps companies are exploiting their better position rather than reflecting their own costs in lower prices.' "

Mr Yeo, suppose you were selling your house (MPs are said to be well-practised in this). You go to estate agents for estimates. Do they ask you what you paid for it ? Do they enquire as to the price of bricks, joists and tiles ? No they do not: they consider the market, and give you an estimate accordingly. Your cost-base will determine whether you make a profit or loss, but it has no bearing on the value of your house whatsoever.

The net result of this infantile public discourse is that RWE are said to be throwing in the towel (who can blame ‘em?): and the government had better not be holding its breath for the fabled new nukes to hove into view. For the thousandth time, can we please be shot of Huhne and get an honest realist into the job ?



ivan said...

The question that should be asked is, how much of the variation is due to the stupid chasing of 'low carbon' and subsidies for alternative energy?

Remove both of those and any carbon taxes, build some descent power stations to supply base load for electricity and things should stabilise. Gas is not my field but being dependant on imports does have problems.

Budgie said...

"... can we please be shot of Huhne and get an honest realist into the job?"

Yes, indeed, Huhne is worse than useless and may even be gone quite soon. But replaced with an "honest realist" politician?? You have to be joking?

The fundamental problem is that almost the entire 'Tory led' government, the Labour opposition too, and our main government in Brussels are firmly wedded to CAGW. Cameron is one of the silliest, but far from the only one, who thinks man made CO2 will lead to catastrophic global warming, that this must be universally bad, and in their hubris, thinks a few hundred windmills will make a difference.

Until that garbage is sorted out we are in for power cuts.

Old BE said...

"some are much smarter at buying energy than others"

And those companies will be able to attract more custom through lower pricing! This is the competitive market in action!

Here's a revolutionary idea: if you think your energy company is ripping you off or has rubbish customer service, switch.

I am with EON and I rate their service and believe they are competitive on price. There.

Demetrius said...

When Edward Grey stood in the Foreign Office looking out of the windows late in the day of 3rd August 1914 what was it he said?

Bill Quango MP said...

Demetrius: He said
"The hallway lights are going out all over Europe. Even with an eco bulb its too expensive to keep them on all night."

Nick Drew said...

Ivan - there is no doubt that ill-advised tinkering with the energy markets has undermined their proper operation: and Huhne proposes to go a lot further than mere tinkering in the next few years ...

gas: we are dependent on imports already, but it is benign because the diversity of sources is so great, and getting better (though some worry about getting gas from people called Ivan ...)

BTW we are also dependent on imports for coal, oil, food, ... and worst of all, neraly 100% dependent on China for so-called 'rare earths'

Budgie - I don't think anyone really knows whether AGW will be C or not

BE - you old market-capitalist, you !

Demetrius, Bill - I still have many months of good old lightbulbs in stock but, for some applications, shall be mightily pissed off when my inventory is gone

"civilisation is energy-intensive" (Lovelock)

"actually, though, it could be less intensive" (Drew)

Budgie said...

ND, the AGW-ers were not, and are not, satisfied with merely AGW. They insist on AGW being catastrophic, and initially at least, something that would swamp and over ride all other effects.

Such a stance was always immensely foolish because "it's the Sun, stoopid". The Sun drives all climate and is not totally stable. Moreover, CO2 does not have the inexorable positive feedback properties originally claimed.

Some of the latest scientific papers indicate that particulates such as sulphides offset the effect of increased CO2, and that the Sun is set for a quiet phase leading to an increased likelihood of reducing global temperatures and possibly even a return of the "little ice age" in northern Europe.

Botogol said...

I am old enough to remember being taught at school that another ice age (albeit a mini one) was on the way. A big effect of temp falling is that the Gulf Stream would divert, making everything even colder.

Now GW is on the way, and a big effect of temp getting warmer is that the Gulf Stream will divert, making everything colder.

rwendland said...

Hope RWE + E.ON manage to throw in the towel on new UK nuclear without spending half a billion $ on the preliminaries, which amazingly NRG Energy in Texas managed to spend before even making the yes/no decision. Post Fukushima they threw in the towel as they had been hoping for Japanese investment through TEPCO, which obviously won't happen now.

View from the Solent said...

You can still get them from here (amongst others) incandescents

Mark Wadsworth said...

"Your cost-base will determine whether you make a profit or loss, but it has no bearing on the value of your house whatsoever."

Thank you. This applies to just about all businesses, and the ideas that they can decide what the market value of their output is, or that market value is influenced by cost, are just silly.

Budgie said...

Mark W said: "the ideas that ... market value is influenced by cost, are just silly".

For houses that is not necessarily "silly". It depends on population density and bureaucracy, and only when the market value sinks below replacement cost.

In the USA for example, where there is plenty of land, house prices are generally lower than here and will not rise significantly above replacement costs. So unless the USA is in recession/depression, house prices there generally will reflect cost.

In the UK with very high population density and a creaky planning system, demand can push house prices way over cost. That really is the shortage of land to build on (the obverse to high population). Like the man said: buy land, they're not making any more of it.

Nick Drew said...

Mark - a rather later rejoinder to your last here: but there are some business models where cost pass-through is how pricing is done

petrol stations are a simple example; several bulk-chemicals businesses, who price on a cost-base formula; old-style defence contracts; some PFI contracts...

and in the USA, the govt is publishing an ever-growing list of 'official' price indices (some say this is for the purpose of distorting them to understate inflation) and many firms are increasingly using cost-formulae based on these indices for their pricing (this trend started when diesel price rose dramatically in 2008: trucking is a huge part of the cost base in the USA for obvious reasons)