Thursday, 21 November 2013

'Big 6' Fragmenting? HMG Beware

For some time now I have been suggesting that if the government continues to beat up on the hated 'Big 6' energy suppliers, it may wake up to find only 5, with RWE and Scottish Power (Iberdrola of Spain) probably the weakest hands.  E.on has its problems too: and while the others (Centrica, SSE and EDF) all probably have sufficient UK energy market ballast to stick around and play 'last man standing', even Centrica has been known to make dark hints.

The beating these guys take isn't just non-stop public floggings in front of fatuous parliamentary committee hearings or in the media.  Nor is it even the fines that Ofgem periodically boxes their ears with (they probably deserve them).  It's also the extraordinary burden of social obligations and 'green' policy objectives they must comply with, because under current and future energy policy they are the vehicle through which government raises billions, soon to be tens of billions for its inane interventions in the energy markets.  No wonder the barriers to entry in the sector are considered well-nigh insurmountable.  General taxation would be the honest (and progressive) way of doing this but they find levies on unavoidable energy bills a more expedient approach.

And now RWE has sold off a large chunk of its UK supply portfolio.  Of course this is being spun as creating a 'Big 7', hence better for competition: but this shouldn't fool anyone.  RWE is a sickly beast, having taken even worse beatings at the hands of German energy policy, and desperately hanging on (like E.on) for massive compo they are suing the German government for in respect of the half-baked, summary closures of their nukes.

Companies have sold chunks of portfolio before, but earlier sales were part of of the baleful consolidation process which, coupled with the restoration of vertical-integration-via-acquisition that we've slated here before, is how we got to the 'Big 6' stasis everyone seems to despise.

In many respects we already had a Big 7 because GdF of France has quietly assembled a UK portfolio of power generation assets and industrial customers making it bigger than Scottish Power in most aspects other than residential customers (of which it doesn't have any).  And Gazprom (yes, Gazprom) already takes the #8 position.  But there ain't much scope for small players in this market (and why should there be?), notwithstanding that gas retailing (to industrial customers) is a relatively straightforward proposition (not electricity, though - nor residential sales).  From time to time a fresh new hopeful joins the fray, for example Co-op Energy (!).  Good luck to them all.

So - let's see how Utility Warehouse, the proud new owners of 770,000 of RWE's best UK customers, make out in this bracing environment.

And watch out for further retrenchment, by RWE and others.  That's a warning for HMG as well as a comment for investors:  how much investment towards their mad, hundred-billion-pound energy schemes can they expect from these guys when their balance sheets are under such pressure ?



EDF Blue Eyes said...

Isn't there a get-out in some of the green loonery if a firm has fewer than 150,000 customers? Surely there is money on the table for suppliers and consumers in the event of the market fracturing into suppliers under this threshold? The loss in administrative efficiency might be outweighed by the tax advantages.

Another spectacular own-goal for the regulators.

Time to get rid of all this green crap*.

* on a micro scale

rwendland said...

Dear EDF BE, you're thinking of the the obligation to low income customers, which does not apply to suppliers with fewer than 250,000 domestic customers (+ some gigawatt criteria). Confusingly named Energy Companies Obligation - ECO.

The major Renewables Obligation (ROCs), worth a lot more in money terms I think, applies to all suppliers.

So I don't think it's such a huge win on this score being a small supplier, a lot smaller gain than economies of scale losses I suspect.

Nick Drew said...

but when, a couple of years ago, the smaller companies were asked by Ofgem for their views on raising the threshold from 50,000 to 250,000, they were dead keen to see it happen ... funnily enough

Demetrius said...

In the military if you find you are an easy target you move off sharpish. Once moved you make sure you can't be spotted or targeted and prepare for future action against you. The UK government energy mess is close to being unsolvable.

Kilgore Trout said...

The current spin on various green blogs and news sights is that coal and gas stations being forced to close is a sign of 'success' and that all of the 'scare' stories one hears about supply shortfalls in Germany and England are just 'special pleading' by incumbents being 'out-competed' by wind.

Any truth in this?

*note: I may be misrepresenting their position. Can't say I understand it.

Nick Drew said...

KG - in brief, the situation is this (& more extreme in Germany, they've gone farther and faster than us)

(1) wind and solar have close-to-zero marginal cost and so bid in to the wholesale market at very low prices - zero if they fancy - but they get paid anyway, and their electricity must be taken by the grid by law, so they don't care

(2) this actually does indeed lower the notional wholesale price - well it would, wouldn't it - making it very difficult for unsubsidised gas & coal to compete. In some instances the German wholesale price goes negative (sic), when there is so much unwanted electricity being forced onto the grid they have to pay people to take it away (or dump it onto other countries' grids)

but why, then, are German power prices-as-paid-by-consumers among the highest in Europe ? Because wholesale price is not the same as cost ...

(3) wind and solar alone can't balance a grid, so what happens after the market closes for a particular period, e.g. an hour tomorrow morning, is that the grid looks at all the electricity that is going to be generated as decided by "the market" and superimposes whatever complex jiggery-pokery it must, in order to get the system to balance. This often includes paying very high prices to flexible sources of power that would otherwise not run (stand-by gas, hydro from Norway, diesel etc), and a whole heap of other sub-optimal and sometimes expensive things, the cost of which they are allowed to add to suppliers' bills - who naturally pass these costs on, plus all manner of other 'green' levies etc

Hence, 'low wholesale market prices' + lots of costs = high prices charged to consumers

(in Germany, whole swathes of industry are exempt from some of these costs so they land on everyone else)

It is hard to hear the words "being out-competed by wind" without feeling ill. or hysterical. Just suggest taking away their subsidies and see how they react

Kilgore Trout said...

Many thanks. I thought it was nonsense, but without folks like yourself putting the alternative POV the 'green' energy providers get a free pass.

rwendland said...

ND, from a first:utility doc, I think the small suppliers mostly object to what happens when they cross the 250k threshold (or 125k duel-fuel). They suddenly become liable to the whole 250k ECO costs, rather than the margin above 250k. So it's a sudden very large cost - much larger than it was when the threshold was 50k.

rwendland said...

ND, I'm very puzzled by the claim seen around a lot that "German power prices-as-paid-by-consumers among the highest in Europe" necessarily implies anything about inefficiency and generation costs.

From my reading of the stats, the high domestic prices is almost entirely due to the fact that in Germany 44.9% (2012) of domestic leccy price is VAT, excise duty (20.5 euros/MWh) and levies, whereas in the UK only 4.8% is VAT (no other taxes).

If you look at the Eurostat table of "Electricity prices for household consumers" with all the taxes removed, average leccy cost in EUR per kWh in early 2013 was:

0.1752 Spain
0.1658 UK
0.1498 Italy
0.1493 Germany
0.1373 EU-28
0.1155 Poland
0.1007 France

So if my reading of the Eurostats is right, German pre-tax domestic leccy prices are 10% lower than UK prices. And UK prices are near the top end of EU prices. Have I misread these statistics in any way, or misunderstood something, ND?

Nick Drew said...

well you've found the numbers, I imagine you are spot on, that seems hard to dispute (unless there is some paranoid reason to think they are not properly arrived at)

a parallel set of numbers - mark-up vs wholesale price ('green extras', including system balancing costs) - would be interesting too

rwendland said...

It would be nice to have better figures, eg with ECO/ROC type costs removed. I don't know any of those.

I guess in the UK ECO/ROC is perhaps 10% of the leccy bill. If in Germany all those type of costs are paid by taxes (eg Excise Duty), base generation prices might be pretty similar. But don't know for sure.

But the UK is very unusual in only charging 5% VAT on leccy and gas, while most of EU charges the full rate at around 20%. So the UK effectively subsidises domestic gas and leccy by around 15% compared to EU - not the kind of thing you ever hear in the MSM. Quite a market distortion, reducing the incentive for insulation and better boilers. It will be nigh on politcally impossible for any UK politician to change that though, and pay green costs out of taxation.

Budgie said...

ND said: "That's a warning for HMG as well as a comment for investors: how much investment towards their mad, hundred-billion-pound energy schemes can they expect".

Having done work for HMG, I can confirm they are mad. And so they will carry on until it all ends in tears.

ND and RWE, I would say 23 angels can dance on the head of a pin. Actually the "real" cost of electricity generation is unlikely to be significantly different in Germany and Britain. If one mad government distorts the market with high VAT to fund its absurdities, and the other imposes anti-"Carbon" levies for similar government twaddle, then there isn't much difference in the madness in practice.