Friday 31 January 2020

Brexit, delivered.

So, I never thought I would really write this post. The UK is leaving the EU tonight!

After all the drama since 2016 I had long predicted the Remainers and the Establishment would get their way and that the UK would not leave. At best maybe a very soft Brexit.

Actually this is too off the table. The somewhat clueless Torres are not going to end up with a soft Brexit by 2021, they will go for a shallow Canada style agreement and if they have to negotiate hard it will still be a pretty decent exit.

I think too that the now rejoiners are going to fail to understand there is no way back. There are no votes in joining the Euro, the EU army etc. This idea we will go running back is for the birds.

Others have written better about the populism, idiotic remainer idealism and the dark period of British politics. Yet now there is a new peace, victory soothes many ills and 2020 is shaping up to be a good year for the UK.

Tuesday 28 January 2020

How Companies Get Rogered Buying Energy

A couple of weeks ago I did a couple of pieces on the shameful saga of Ofgem giving energy supply licences to scamsters and no-hopers, the baleful consequences of which we all pay for.  En passant I'd remarked that, while this is mostly a phenomenon of residential energy supply, things generally being more orderly in the industrial & commercial sector, some large firms that ought to know better still get turned over when buying their energy.  

How so?  Surely, procurement is a fairly well-developed profession - for staples, if not for exotica like enterprise software - and there's plenty of fierce competition between highly competent suppliers in a fully commoditised sector like large-scale energy.

The problem started a long time ago, when gas and electricty were monopolies and a corporate "energy buyer" mostly had to step up and take the annual humiliation of being handed a take-it-or-leave-it "offer".  The only scope for negotiation at all (usurprisingly) came if, and only if, the buyer could take the monopoly's "sales rep" to see, with their own eyes, the actual kit that enabled the buyer to switch to another energy source, generally diesel for heating / a diesel gen-set.  Most of them just accepted the humiliation.  The role of energy buyer, then, was not one for anybody with an ounce of pride, or (frankly) any brains.  So come the dawn of competition, the sharpest pencils in the box were elsewhere: but the neglected energy buyers all achieved stonking price reductions anyway! - because the incumbents had been grotesquely over-charging (monopolies, yeah?) and were sitting targets for the new entrants, who were simply selling on price.  Not much immediate incentive to upskill in the energy buying department, then.

Enter the Third Party Intermediaries (TPIs), as brokers are termed in this sector.  Spotting the stupidity of many a corporate energy buyer, and in many cases the corruptibility of the energy suppliers, they insinuated themselves between the two and proceeded to claim (unacknowledged) fees from both sides, for a "service" of very dubious value in most cases.  The honest suppliers (of which there are many) despair of being mediated thus; the unscrupulous simply enter preferential deals with the TPIs, paying outrageous commissions (which they add to the price, naturally) for business that is mercilessly steered their way by the TPI who, all the while, is assuring its supposed clients (whom they are also charging) that they are all definitely getting bottom-quartile prices, and the very best available at the time, using bent data entirely concocted by the TPI itself.  (And - would you like to jon us on our golf day next month?)

The margins made by the most rapacious of the TPIs are commensurate with the margins of the suppliers themselves (I've seen the books), for virtually no risk whatsoever - quite unlike the situation for the suppliers who for the same £££ carry all manner of commercial and operational / delivery risks.  Not even, for the TPIs, the risk of being banged up - which, behaving like that in the financial sector, would indeed be a risk they ran - because, yes, the energy TPI sector is unregulated**.  Undeclared commissions, bent procurement processes and all.  Thanks again, Ofgem.

It is possible there are some honest TPIs as well, delivering a genuine value-adding service.  I'm not sure I've ever encountered one, but the possibility remains.   (The smart corporates, in particular the companies for whom energy is a significant proportion of their variable costs, wouldn't go near a TPI of course.  And why would any of them?  If they bother to look for themselves, it's a competitive, and highly transparent market!)

In this case (unlike those of the residentials, and the category of small business buyer we'll look at next) we can say caveat emptor with a fair degree of justification.  These are big buyers we are talking about that can reasonably (if vainly) be expected to look after themselves; nobody's fools - when it comes to their core competencies.  But for many, energy buying ain't one of them; and they pay for it bigtime.  (And since they pass on their costs whenever they can, maybe indirectly we do, too.)  Why they fall for the TPI blandishments, year after year, is completely beyond me (despite my attempt above to rationalise it a bit, or at least contextualise the history).  Why Ofgem stands back ... well, it's a lot on its plate (haha!), and these big corporate eejits don't deserve molly-coddling.

Doesn't do much for one's faith in rational markets, though: because the data is out there for the suckers to identify precisely how badly the TPIs are doing them down++.   
Next time: the even-worse fate that befalls the small commercial customer.

** Except of course by general commercial law
++ But wholesale market data-feeds cost money, and the TPIs assure them they'll pass on the market data as part of the service!

PS   It gets worse.  I have offered various large industrial energy users to have the energy purchasing performance of their TPIs audited.  It would be easy: all historical wholesale market price-points are archived with a date-time stamp, second by second.  The industrial would provide the exact timings and prices of the deals their TPI has done on their behalf (or advised them to do).  The add-on charges made by the grid, etc for delivery through the system, are 100% transparent.  So it would then be easy to back-calculate the difference between the "legitimate" all-up price based on the genuine best-available market price at that time, and what they were actually charged.  If that difference is a contractually agreed TPI mark-up, then fair enough.  If, however, it's higher, well then ...   And if it's systematically higher over a period of time ... or if the TPI has been advising purchases at times in the market when cheaper deals could have been done at a better time on the same day, or a better day in the same week, or a better week in same the month ...

D'you know what?  I never had anyone take me up on that TPI audit proposal.  It did put an abrupt stop to several conversations, though.  The embarrassment is just too great.  

Monday 27 January 2020

Labour still lost - Lisa Nandy and her incredibly clever tax ideas

I don't quite have the quality of post for today that Mr. Drew was able to produce over the weekend. But this snippet from the Labour leadership contest got me thinking a little about both how stupid these people are but also what tax policy could mean in 2020. 

In the Mirror article, Ms Nandy says she wants all companies to pay minimum wages after benefits are calculated so that big companies have to support workers at this level and moreover to add a special tax which is in effect a top up tax for paying such low wages. . Whilst to Ms Nandy this sounds good and suitably comradely, it would create some rather odd outcomes. Tesco would likely get a very large new bill, as would any big employer. Smaller employers with higher wages, I don;t know such as say a large global investment bank or Facebook or Apple, would not get hit at all. So in effect it would be a tax on employment - just what the economy ordered. 

Of course, in a wider context a policy like this is even worse. It would further drive companies towards automation and reducing work numbers.

So how do we tax these pesky companies. I think a lot of progress has been made with BEPS (Base Erosion and Profit Shifting) which is an international agreement that has been spread worldwide. This has really pushed hard on the easy use of international tax structures and and upgrade is on the way. 

Then of course the reality becomes that you have to tax what is done in Country to have a hope. for me this means a greater lean towards consumption taxes and complex transfer pricing well as perhaps higher import and export taxes, especially on digital goods. In return, there needs to be a reduction in employment taxes and also business property tax where the alignment is well out of kilter with value.

All of this is worthy of a longer post which I will get too - certainly more quickly than the vacuous Nandy will come to any real conclusions on tax policies!.  

Sunday 26 January 2020

China: What Else Will the Virus Bring?

This is not to make light of the new coronavirus outbreak, which (we must suppose) could be the death of us all.  It is, after all, pretty much exactly the scenario painted by those who write about how pandemics are much more likely to do for mankind than any other phenomenon you might hypothecate, in our world of careless hygiene and careless freedom of movement.

However, as is my wont I am following it with interest as yet another window on the ways of mysterious Cathay under the Xi regime.  Many commentators have lauded the (relative) openness with which the Chinese have made information available on the current outbreak, in stark contrast with the SARS episode.  Of course their idea of what impresses people - mostly, their own people, I suppose - is a little quirky by our standards: those pictures of earthmoving kit, working 100 to the hectare, on "a new hospital to be built in 10 days", are "impressive" in the way that 10,000 drummers were at the start of the 2008 Olympics.  And it was a little two-edgey to hear the expert roped in by the Beeb, saying that it was a good job the outbreak happened in China, because "they can do remarkable things" - i.e. they are a dictatorship.

Xi doesn't seem to mind ordinary Chinese people being interviewd in the street about the outbreak, and they seem to say, quite spontaneously, things he'd be gratified by: "China is a very strong country, we can fix this" etc.  We needn't doubt that's what they'd naturally want to say, and want to think. 

Still, I can't help thinking ...  isn't this just another small step along the road to "westernising" Chinese thinking?  The idea - dinned into so many instinctively dictatorial western CEOs - that openness is its own reward, tht the cover-up is infinitely worse than the original cock-up, that honesty in the face of potential embarrassment is a sign of strength raher than weakness; that if you suppress the truth, the rumours get seriously out of hand, etc etc etc.  And that eventually, when you take these small progressive steps and multiply them by 1.3 billion, with the further multiplier effect of social media ...  And, not all of Chinese public reaction will be quite so congenial to Xi

But I've been wrong many times on this, notably over the 2008 Olympics which I (and many others) felt would inevitably force upon China a step-change towards liberality.  Well, there wasn't much sign of that.  And one could float a couple of contra-indications.

Firstly, perhaps (after a putative success on the part of the Chinese authorities in getting on top of the outbreak) it'll be spun as a triumph for the dictatorial, controlling ways of Chinese government.  See, telling people what to do for the best, and making them do it instantaneously, via habits of unquestioning obedience and trust in a wise government, is the way to solve 21st C problems ...

Secondly, take a look at the CiF BTL comments on the Grauniad piece cited earlier, reacting to articles on how "wet markets" for meat are to blame.  The trolls (state-sponsored?  freelance?) are out attacking any idea that China has to change its ways: e.g. this, from a commenter imaginatively calling themselves "ID9634782" 
"Guardian articles that cover the spread of the virus in China carry a racist undertone and as expected bring out a whole lot of racists crawling out of the woodwork. But in this case the racists are mostly from the so-called enlightened left who demands the Chinese people to change their living habits to suit their world view... how arrogant some commenters are to demand the closure of wet markets, which is an essential fixture of Asian cultures. Because your taste bud is used to the stinky smell of the frozen cold meat, it does not mean that Chinese people have to do the same."
Old habits die very hard.  And not just the culinary habits.


Friday 24 January 2020

Evans-Pritchard on Oil & Commercial Revolution

AE-P seems to be a bit of a cult fugure for some, and here he is on the propects for "Negative Oil" (meaning negative CO2 emissions) and "negative aluminium" (ditto, mutatis mutandis) - and he doesn't seem to be behind the usual DTel paywall.  What does Negative Oil mean?  It seems that "emblematic" oil compay Occidental intends to "become net carbon negative on all its operations and the oil it sells in order to insulate itself against the enveloping climate backlash".

Before getting stuck into this very interesting subject, we do need to enter several caveats.
  • the very fact it's not behind a paywall means that it's being sponsored - presumably by Oxy
  • the definitions of "negative oil" that we encounter as we go along are pretty weasely - at one point it's as unimpressive as "you can have net negative reservoirs", which has been true for a very long time - in certain very specific and non-typical circumstances
  • the "negative aluminium" stuff comes from "Russian owned EN+" (Deripaska), fronted on this occasion as on many others by "Lord" Greg Barker, a notorious BS merchant 
Putting that important dollop of skepticism to one side, there are a couple of significant takeaways.  The first is the very real prospect of investors turning sour on "traditional" hydrocarbon companies, the brighter ones among which are rushing towards both the buckets of greenwash and, with the longer-term picture in mind, the strategic corporate restructuring advisers (statement of personal interest here, *ahem*).  The prospects of (a) some seriously stranded assets and consequent balance-sheet impairments; and (b) increasing cost of capital, are very serious indeed for these most capital-intensive of businesses.  Public opinion is fickle, and clamour for divestment can really rattle institutions.  When it becomes a run on the bank, it's a self-fulfilling prophesy, as a lot of green activists are fervently hoping and striving for.

On the other hand.  The actual demand for oil & coal (as opposed to demand for oil shares and coal shares) isn't going to fall precipitously: it can't, while China still breathes**.  It's all a bit reminiscent of the tobacco industry a decade or so ago.

What can easily happen, though, is that even with stable-ish demand, the cost of capital rises (due to unpopularity with investors).  We're talking about western companies here, of course - there are loads of NOCs who don't care, and may be looking forward to stepping into the breach, picking up distressed assets and market share.  But they ain't necessarily very good at production technology (or indeed finance), even if they plan to hire a bunch of mercenary engineers to help them along.  (And there may not be so many of those; because the big players retreating from oil are piling into other energy tech, and will have jobs for many engineers - even if not always the same ones.)

So, while there'll be no shortage of oil, on both counts (cost of capital and engineering efficiency) production costs are going to rise. 

One question, then, is: does this wash through into the price of oil?  It's an important fact that in the short and medium term, production cost has bugger all to do with price except at the very sensitive margins.  (Plenty of people will tell you there is $2 oil available in large amounts in Iraq; but ...) 

Another question is: WTF happens to the pension funds of the western world while the IOCs are busily and expensively redefining themselves?

And I'm sure there are more such fundamental issues to ponder, when we're at such a remarkable turning-point.  Have at it in the comments, C@W-ers. 

** not intended as a pun or off-colour comment: but there is a point there

Wednesday 22 January 2020

Mr Drew Gets a Smart Meter

I have watched the painful rolling-out of smart meters with derision.  It's an awful example of bad programme design: why would anyone want to entrust it to energy suppliers, rather than the network operators, which is infinitely more logical?  Inane.

However, I've nothing against accurate readings (of anything, really); and the potential benefits are great.  And I've nothing against the electricity company knowing in real-time what my consumption is: those who think it'll be used to coordinate burglaries on seemingly-unoccupied homes are forgetting that their bank / credit-card provider, and even more so their mobile phone network, generally know exactly where they are at all times, and a great deal about what they are actually doing (maybe, indeed, absolutely everything about what they are doing) - also in realtime. (If you are fool enough to entrust any of your data whatsoever to ScamEnergy, well, that's your business.) 

I must admit I was surprised at the complete lack of outrage when it was revealed that some health authorities are using smartmeter data on a user-identified basis to diagnose early-stage dementia (which apparently they can, via abnormal & random energy-use patterns at all hours) - but there we go: it's always hard to know what's going to upset people and what isn't.

Anyway.  Finally, a well-known energy supplier, obviously under the cosh from Ofgem for delinquency in meeting its smartmeter installation targets, offered us £50 to have a smartmeter: and we said Yes.

Well.  What a damp squib.  Installation was 100% trouble-free; and matey warned us the gas reading would only come through onto the neat little display after "a bit of a delay" -  but it's just so insensitive, in all respects.  The gas reading does indeed suffer a 5-10 minute delay before registering on the display, after either switching on an appliance or switching off (WTF is going on?), and even the electricity reading can lag by 30 seconds - though not always, mind.  

And in terms of the actual, "quantified" readings given (analogue), it's literally a blunt instrument, and grossly so.  My prior understanding was that a skilled smartmeter reader could learn to interpret the difference between the signature read-outs of (say) a kettle vs an electric iron.  Well, maybe back at Big6Co HQ they've got some reading that's finely enough tuned for such differentiation, but our pathetic little SMETS-2 certainly doesn't offer any such refinement.  (BTW, gazing at a modern water meter is infinitely more rewarding in terms of sensitivity to what you're using - you can literally detect a dripping tap.)

This is pretty reprehensible and I want my money back!  Oh yes, I forgot ... they're paying me ...


Monday 20 January 2020

Oman: Fingers Crossed

Readers will know I have a great and longstanding fondness for Oman: and now its long-time Sultan is gone.  RIP, Qaboos bin Said Al Said.

He was never, *ahem*, likely to have any children - but there seems to have been a managed succession - rather different to how he took over from his father, although even that was bloodless.  I rather guess HMG had a discrete hand in the politics that resulted in last week's orderly handover.

Qaboos was the epitome of a benign dictator.  So far as I could judge, he was genuinely loved by his people.  In order to pevent begging - which would have reflected badly on him - the indigent were invited to go to the nearest post office to be given money.  There was no suggestion this beneficence was abused.  When a young tribesman felt the time was right, he would drift into a barracks and volunteer for military service: and when he felt he'd done his bit, he would drift off again.  Surely a bit of a problem if operations were underway? - I asked.  Why then, of course, he wouldn't leave at such a moment!

Such was the code of honour that bound the people and their Monarch.  We can barely understand it.  Long may the world still be able to contain such a nation.

I hope the succession works out well for them.


HS2 - the costs get worse but what options are there?

You may expect the us here at C@W to deplore the rising costs of HS2 (hint, looking back to 2013, we have amazingly been consistent on this) as the gross workings of an excessive public sector.

The sheer rise in costs in incredible, nearly quadrupling from the initial estimates and there are some reasons why which make it so:

1) Ploughing through the home counties and London has led to a lot of legal challenges as a lot of expensive compulsory purchases of land. In China, where they doe things more cheaply, they given you an option of leaving your house or being bulldozed within it - saves on funeral costs too.

2) In a bid to be green a lot of allowances have been made not to damage the countryside. Again in many countries the simpler and cheaper option is to build up and over the forests etc on a raise trainline. It looks terrible and long term is more costly to maintain but is much cheaper to get going with.

3) With a dearth of other big contracts to do, the private companies involved have gold plated the contracts to extract as much value as they can from the Government.

Despite this, what else are the Government going to do to revitalise the North. In a less climate change affected state we could build a ton of new airports like the US and have much easier access to flying but that is not 'going to fly' with politicians today. There are no easy choices that will enable large scale upgrades and whilst extending motorways is all very well that needs to be done as well, not instead of HS2.

Additionally, electric trains can be run off a main grid so again they are long term a more sustainable form of mass transit.

All in all, it will be very disappointing if the Government cave in to lobbying and cancel this project at a time when UK borrowing costs are still near all time lows. If anything we should be pressing the button on these projects and looking to extend the service to Scotland and Northern Ireland over the next few decades.

Thursday 16 January 2020

So long and thanks for all the fish

The end of our EU membership is upon us and the sangfroid from watching the dying embers of remoanerism try and block an EU exit celebration in London is a delightful sight to behold. This is what has become of all that money being spent on People's Vote, the marches, the Qusilings trips to Brussels - reduced to trying to stop a party in Trafalgar Square. Oh, the deep joy.

However, the Quislings like Blair are I can see now focused on trying to force a Hard Brexit. Blair has been advising Macron on the weak points politically in Brois' strategy with a view to forcing a no deal and thence re-launching their Rejoin campaing immidiately.

None of this is very subtle so no doubt Cummings has war-gamed the strategy but the outlines are clear, firstly for the EU to insist on the touchstone of fishing which they know will drive the right wing Brexiteers mad if we don't re-assert control of our fishing rights and then to complete a pincer movement with demanding full regulatorty compliance both now and in the future. Again by doing this it is barely leaving the EU.

However, I see some holes here. Firstly, regulatory compliance is actually OK as it allows for the low friction trade we want. So I am sure this will be bargained away at the last minute for a high price. The fishing is more troublesome but again there are a wealth of access compromises that can be made. The big win is ending free movement whilst retaing more or less ful access to the singel market and enabling our service setor to continue to sell into Europe.

From where the EU are starting this looks doable to me this year in outline. Of course Blair and the others will keep trying to push over Boris' red lines, but I do wonder whether in the end the EU would be crazy enough to torpedo a deal in the hope that the shock worked - they have form as they did this with Greece, but I am not sure that is an experience worht repeating.

Monday 13 January 2020

Last rights for FlyMaybe?

It has been a long time coming, the demise of Flymaybe (indeed that has been its nickname for several years now, a nice mix of the threat of coporate collapse and poor service in one handy monicker).

Last year Virgin Atlantic stepped in for some reason lost on me and apprently has spent £100 million of Private Equity money trying to turnt he airline around. 

Alas, it seems to haev failed. For me though the heroic nature of Flybe's fall has some great angles. 

For example, it tried to corner the Hebrides business in Scotland and outcompete Logan Air. It leased expensive planes, bought landing slots and went for it. All at a massive loss. But who sat down and decided that was there world domination strategy, what next, the inter-Ireland market? 

Really, what a terribly run business by the management. Of course, the usual suspects when it comes to airline issues are alive as ever. Out of date IT which means ticketing costs more that it should and scheduling is slow so aircraft don't turnaround quick enough to generate more revenues. Plus the price of oil moving around and a weak pound sliced into margins. Finally of course, the big boys like easyjet just cherry pick the goo routes and effectively have Flymybe as a free test bed for them to see what shorthaul is working. 

Ouch, I can't see it being rescued this time and instead a period of administration and trying to be reborn with out its debt might prove the solution. 

As ever in the airline industry the saying remains true - how do you make millions in the airline business, start with billions....

Sunday 12 January 2020

Weekend Sport: Fratricide at the Guardian

It is hardly to be marvelled at, because the Graun gives space to some pretty ludicrous stuff (hardly unique in the meejah, but still).  At the same time, they have the wonderfully waspish Marina Hyde, who can't quite believe the crap the gets commissioned alongside her own crisp commentary. 
there is a particular stripe of Labour self-indulgence that has simply redefined what it means to be an absolute shower of shits ... However mirthlessly, you do have to laugh at the various Corbyn outriders who’ve now been wrong for two elections – in most cases for three – but have not even broken stride since the biggest defeat since 1935 before turning up with some more advice for what Labour should do next. What can you say? Other than: why are you still here? Did someone order some more wrong, with a side order of obnoxiously erroneous? Because I definitely didn’t. You’ve just spent four years plugging a political Fyre festival. On the matter of where Labour should go next, I would honestly rather hear what Ja Rule has to say from here on.
(For the avoidance of doubt: Owen Jones, Paul Mason, Zoe Williams - This Means You.)

What sport.


Friday 10 January 2020

Downfall: Small Energy Suppliers, part 2

.... continues

So several factors combined to give artificial incentives, and a leg-up, to tiny companies wanting to become energy suppliers in the UK residential sector a few years ago.  What happened next; and do we care?

What Happened Next?

The small-supplier movement started slowly, and a number of the companies that were encouraged to join the fray were, in the early days, purposeful and professional - just the kind of new entrant the authorities were hoping for.  Some of them are doing great things today, and look set to be a big part of the future of energy supply.

Unfortunately, word got around that there was a money-for-old-rope game in town and, as rapidly became evident, eye-off-the-ball Ofgem wasn't hesitating to give licences to even miniscule companies with no obvious professional capability or viable business plan.  Enter the chancers; some of whom set up several suppliers. (Their intended trick is sometimes hard to divine; but some worthless little supply companies have subsequently changed hands for [high] prices that make it virtually certain there's a scam involved).  Using the truly excellent Companies House website you can readily check up on any you come across - or, out of curiousity, from the list of those that have already gone under - and you'll find they frequently stink.  If anyone at Ofgem had been bothering, they'd have spotted this, too.

The early straw in the wind came in November 2016 when the first of the minnows, GB Energy, went bust.  A glance at their books shows there were some very costly "related party transactions" involved just before they went under (something that's been repeated in other cases), never a healthy sign.  Still, Ofgem simply reassigned their customers to another supplier (the 'Last Resort' process) - who was then able, under the rules, to charge us all any costs they incurred in taking over the stranded accounts.  GB Energy, though, was in one critical aspect not typical of much of what followed: because the steady decline in wholesale prices hadn't yet reversed.  That came a year later.

It will have occurred to many readers that the trick we noted last time, of going short into a falling market and buying in the Spot (thereby undercutting all the forward-hedgers), wouldn't work if prices started rising as, inevitably, eventually, they did.  At this point a prudent player - even one with an appetite for risk - switches strategy and starts locking in (either using the traded market, or via an OTC Power Purchase Agreement [PPA]) before prices go any higher:  "risk off", in the jargon.   That is, a prudent player with sufficient line of credit to buy forward ... and of course many of these jokers are chronically under-capitalised.  No proper wholesale player is going to countenance selling forward to that type of counterparty (except on punitive terms like cash upfront) - what we might call Northern Rock Syndrome.

Game over, and collapse of stout thin party when the cash finally runs out.  It's been happening left and right all through the last 24 months: estimates vary, but those who watch it closely reckon around 30* have gone under.  And there are dozens more of these chancers still out there!

They delay their demise, of course, by hanging onto the VAT and "green" levies they've collected from customers and ought to be remitting promptly to the authorities.  The highest-profile delinquent in this game has been Robin Hood Energy** (supplier to J.Corbyn esq.), established by the Momentum eejits who run Nottingham City Council, and much lauded by Ms Nandy (a mistake, that).  Owing £9.5mm in Green levies, their licence was on the point of being cancelled by Ofgem last autumn, when the hapless Nottingham tax payer rode to the rescue ...

Does it Matter?  (Ans: Yes)

Many of the capitalists amongst us instinctively say 'no' - it's the role of the market to facilitate those with good ideas and with bad ideas alike, to take their chances at their own expense.  The good will thrive, the useless will fail, and Darwin will decide which ones are which.

That's fine, up to a point.  But as some of our perceptive BTL commenters have noted, these particular corporate failures are not victimless.  OK, the customers get reassigned to other suppliers: but there's hassle for them, and cost for us all, as the new supplier gets to recharge any costs it incurs through the process.  Furthermore, when a company goes under owing Green levies etc, the deficiency thus arising is also automatically "mutualised"  - through all our energy bills.  Meantime, the founder of QueerStreet Energy (formerly NoName Energy) may have been making out like a gangster for several years, and retires comfortably to plot the next scam.

Ofgem is truly culpable in all this.  The warning signs were there even before GB Energy went under (how the Hell could anyone imagine there could be 100 viable suppliers in such a market - FFS!); but if they'd at least acted decisively at that point, they'd have saved us all no end of trouble.  I'm often broadly congratulatory towards Ofgem: but on this one they've screwed up bigtime, in the most disgraceful fashion, and seriously brought the open energy market into disrepute.

As I wrote on Monday in another context: free markets need good regulators!


* Some are so small and obscure, their names and departures have passed unrecorded in the MSM nor even in the trade press.
** Another time we'll look at the sorry tale of Local Authorities getting into energy supply.  Also, from yesterday's episode, we'll look in future at how Industrial & Commercial energy buyers who should know better often get shafted - and how those that know even less get seriously turned over.

Thursday 9 January 2020

Tiny Energy Suppliers Going Bust

A couple of times recently we've mentioned the 2019 phenomenon of minnows in the energy supply business falling off the perch (to mix metaphors gaily) in their dozens.  It'll be continuing into 2020, believe me.   (1) How can this be?  And (2) does it matter a hoot?

(1) WTF?

For many years the bane of the residential* energy sector was the 'Big 6' oligopoly, of deserved ill repute.  The I&C (industrial & commercial) sector, by contrast, has long been well-populated with credible suppliers and ultra-competitive prices on offer for any buyer who knows their stuff.**

The difference is simple.  I&C customers are relatively easy to service.  Residential customers can be an absolute nightmare in several dimensions;^^  plus, the governent dumps all manner of social policy objectives onto residential suppliers.  And energy wholesale-market trading is a necessary part of the supply chain, but notoriously difficult - essentially a big-boys' game.  Traditionally, the only way it could all be made to work was by having critical mass of customer-base, vertical integration, economies of scale, pre-existing trading floors, risk-management & billing systems etc etc.  

Hence the Big 6: and even for them, profits were often not easily come by; whereas fines from the regulator for all manner of cock-ups were commonplace.  Oligopoly is never ideal (to put it mildly), and Ofgem + the government would regularly tear their collective hair over how new entrants could be encouraged into this difficult business.  From time to time someone like the Co-op with apparent natural advantages would dip a toe into the market, only to lose their shirts.

It's not hard to see, then, why Ofgem would actually be delighted when the number of players in the residential sector suddenly started to grow.  And grow ...   And some of them were really small ... how did this happen, in a space seemingly reserved for big boys?  The answer is in four parts.

(a)  A few years ago there was a sustained period of steadily declining wholesale prices.  Now Big-6-type players are fairly conservative & commercially responsible, and tend to buy (or hedge) forward for at least a decent chunk of the portfolio, certainly against those of their customers who are on fixed price tariffs.  In circumstances of falling prices, it's not difficult for a player who's short (i.e. has sold forward, but not bought forward) to undercut those Big-6ers, i.e. selling on the basis of price alone, then simply buying day-ahead in this falling market - which is the easiest form of trading.  Opportunistic players were encouraged into the market initially by the simplicity of this trick.

(b)  Also a few years ago there came onto the market some fairly competent software packages known as "supplier-in-a-box", meaning you could buy not only an off-the-peg company kit, but one complete with billing systems and all the necessary market interfaces, too.  Being standardised and commoditised thus, the software wasn't even very costly.  This dramatically lowered one of the previous barriers to entry, clearing a passage for tiddlers.

(c)  As the government layers on ever more "green levies" onto energy bills, someone has to collect them from us - and it is the suppliers.  But they don't have to pay them over immediately - indeed, as you'll have seen in the press, some didn't hand them over at all ! (more in Part 2)   So - a major contribution to working capital was gifted to suppliers.

But - isn't it still a major challenge to build up a customer base - when you're a minnow that nobody's heard of?  Even offering cheaper prices, surely it'll be an uphill struggle for NoName Energy to sell anything at all?  That's where the final piece of the warped jigsaw falls into place ...

(d)  The 'flipping' business model.  Up until a few years ago, price comparison sites listed companies' offers and invited you to select.  You probably weren't ever going to pick NoName Energy, however cheap they were.  But with a flipper site, you were being invited to let the algo choose & switch on your behalf.  Now, all NoName had to do was pitch low (or in some nefarious cases, slip the site a few quid in a brown envelope) and be given as much business as it could handle.  And with wholesale prices declining ...

You can, I think, see where all this is going  ...  even if Ofgem couldn't.   (to be continued)

*  Many use the term "domestic" but this wouldn't make sense to some of our non UK readers, for whom that word applied to energy customers means "in-country" (as opposed to "overseas").
** A surprising number of large companies that ought to know better get stuffed every year because of the crazy way they go about energy procurement; and many smaller ones get royally rogered.  But that's for yet another post ...
^^ E.g. on the coldest day in winter I might turn every heating appliance in my house up to max.  Or I might go skiing, and use no energy at all - & I don't have to notify anyone.  And I can swich suppliers at the drop of a hat.  I&C customers don't behave like that.

How Long the Dollar as World Currency?

BTL in a recent post, Anon asked for views on how much of the present ME unpleasantness is explained by US desire to maintain the dollar as the currency in which the world buys oil?   Anon went on to mention that Gaddafi head been mooting a barter scheme to circumvent dealing in dollars before his demise.

This is quite a long post so I'll summarise here: not really plausible, IMHO

It's not an academic response, nor does it contain any quantified macro-economics (my being in neither profession): but after a career in pragmatic multinational micro-economics - the energy business - I do have a number of practical observations.

*   *   *   *   *   *
1.  Liquidity / critical mass is vital in every sector.  Nothing stymies business worse than non-fungibility and non-convertability.   Needless to say, if anything that has "currency" today is doing a halfway satisfactory job in the market, that militates strongly against the adoption of anything else.  The intertia / barriers to entry & exit are great.

2.  There have long been plenty of national-pride-based attempts to drag the commercial world away from Anglo-US dominance of the instruments of liquidity.  In my own sphere: many countries hate having their oil priced against Brent (which almost all crude oil is, except US production), let alone in dollars; and there have been attempts to establish marker-prices for other blends, and to have them traded in other financial centres.  Kuwait Blend; Urals Blend, Dubai ... they come along, they get reduced to a basis-differential against Brent, and the world carries on.  And this despite apparently formidable technical difficulties in maintaining "Brent" as a marker (due to terminally declining North Sea production).  But the clever chaps in London cunningly keep extending the definition of the blend and - thus far - they've had total success.

Likewise, and to Anon's question, lots of folks have dreamed of having oil - even just their own local production grades - priced in their own currencies.  You might justly argue that provided there is full FX convertability between those currencies and USD, what's to stop them?  Answer: nothing - except it would be entirely empty.  The whole business world speaks English (and reads the FT), not Russian or Mandarin.  Arbitrage ensures "their" price would always be (Brent USD +/- basis)*FX.

As regards barter schemes ... well, money was invented, partly because there are distinct, nay fatal limitations as to what barter can achieve.  So I don't think Gaddafi represented any kind of threat to dollar oil trade.   BTW, the Russians have tried to sell gas to China in complex packages with industrial equipment - but the Chinese are having none of it!  Cash on the nail, so far as they are concerned.

3.  Some things do change & evolve: but typically only for very good reasons (which do not include national pride).  Example: the first natural gas trading hub in Europe was the UK's "NBP", and European gas prices for many years were given as NBP (+/- basis).  How logical was this, when the UK isn't remotely the centre of gravity of European gas movements, and the Eu deals mostly in EUR?  Very logical indeed - when only the UK's gas market was truly liquid.  However, over time, unsurprisingly several other hubs emerged as the rest of the EU belatedly caught up on gas trading (well, sort-of), one of which - the Dutch TTF -  was very much closer to the continental centre of gravity than our peripheral island market.  A German hub would have been just as likely a candidate: but the Germans genuinely don't understand how markets work, and screwed up their market design.  The Dutch are much better at it: and so today the TTF is more usually given as reference point for "the gas price in Europe".  (By the way, NBP and TTF trade at incredibly high correlations and the basis differential is always easily rationalised - as you'd expect, because they are both liquid, and generally inter-connected physically.)

4.  So: given that things can change over time and with good fundamental reasons, who's to rule out everything coming under Chinese hegemony in the long run, when their economy becomes dominant?  Well, in the very long run, maybe.  But right now they don't really understand markets either, nor indeed quite How The World Works.  Case in point: they'd spent years cultivating Gaddafi (for his oil), and were gobsmacked when "the West" just did away with him one day.   WTF?, you could hear them saying.   And, to their disgust, right now large & mainstream Chinese firms are obliged to, errrr, kowtow to US sanctions on Iran, much as they'd like to exploit the situation commercially. 

Of course, they hate this stuff and have every intention of supplanting it.  One day.  And who knows, maybe Trump will so overplay his hand, he'll help them accelerate the process.

Then again, the French have long hated the use of the English language everywhere - and most specifically in the organs and councils of the EU.  Tough titty, mes braves; not even Brexit is going to change that. 

No lengthy post is complete without an army anecdote.  All army vehicles come with a comprehensive toolkit.  But as I quickly discovered when becoming responsible for a troop of 30 vehicles, there's only one item out of a dozen or so that's ever taken out of the box, and which is permanently going missing - the Spanner Adjustable.  

Yes: some things turn out to be Really Useful.  The English language, the Brent oil contract, and the Almighty USD are excellent examples.  The clever Chinese will need to come up with something even better if they want any of them to be superceded.


Monday 6 January 2020

Power Cuts: Free Markets Need Good Regulators

I bow to no man in my scorn for the way in which publicly-owned monopolies conduct themselves, having had detailed exposure to the workings of the old British Gas and CEGB, and still recalling the commercial bruises received at their hands.  One suspects that Labour's manifesto commitment to put the electricity distribution networks into the hands of local authorities and "open & democratic communities" played its part in crushing their hopes with voters, who also have views on the matter.

That said, open markets and natural monopolies need appropriate regulation; and this is never more true than in the electricity sector, being both enormously complex and absolutely life-and-death vital.  FWIW, my broad assessment is that Ofgem does a pretty fair job, albeit with some notable lapses(1); and that under the auspices of Ofgem (and Offer which preceded it), the National Grid and its various organs are pretty competent organisations(2).

Which brings us to last August's power cuts, and this month's official reports on the same.  The Grid is undergoing a lengthy period of forced evolution to accommodate the very new paradigm of "low-carbon" generation and its fundamental ramifications: and we're not to be surprised when it gets things wrong at the margins.

Still, the final reports on the power cuts (published at the end of last week), from Ofgem and the Energy Emergencies Executive Committee (E3C), contain more than just fascinating technical stuff.  It's pretty clear that not only the high-profile bad actors (├śrsted, RWE and a couple of the Distribution operators, all of whom have been invited to make £££ in "voluntary redress contributions") have been at fault here.  A unspecified number of players who should have been quicker off the mark with technical responses to the situation - because they are paid good money to be quick off the mark - were also delinquent.

Ofgem needs to be all over this, and redeem itself for some shocking recent failings(1).  Open markets are always the way to go wherever possible: but everyone is prone to getting lazy & cutting corners when things are quiet ... but that's exactly when you need to fix the roof.  The periodic sound of the cracking of the whip should be what ensures things never stay quiet for long.


(1)  By the standards of, e.g., other Eu energy regulators, Ofgem and the whole UK regulatory system is first-rate - and widely regarded as such overseas.  But that's not setting the bar as high as it needs to be.  Serious power cuts such as August's are proof enough: and the multiple recent failures among small energy suppliers are a genuine indictment (maybe more on this in another post).  Ofgem truly lost the plot on that one: "taking the eye off the ball" doesn't go nearly far enough as a critique.

(2)   My big beef against National Grid is perhaps more fairly levelled at government, which has legislated to give them a guaranteed return on "necessary" capital investments.  This incentivises Grid to endorse all manner of crazy "green" plans, because accommodating these schemes requires capex!  Again, Ofgem is supposed to be the hand on the tiller steering them away from costly nonsense, which is charged to us all.

Saturday 4 January 2020

Ringside Seat for China

Any pugilist welcomes the opportunity of a ringside seat where a potential future antagonist is on the bill.   Russia and the USA greatly enjoyed China's discomfiture in its ill-judged 1979 assault on Vietnam.  Three years later, the Russians took a close professional interest in our recapture of the Falklands, from which they learned several lessons.  Even more salutary for them was Gulf War 1 in 1991: they'd been skeptical as to whether the NATO AirLand Battle doctrine was workable, and discovered to their dismay that it was.  (This helpfully persuaded them to sit out the 1990s, when a less chastened Russia might have lashed out as a diversionary tactic against its post-Communist humiliation.)

Yes - better to discover what your future opponent has got in his locker by watching someone else lead with their chin.  It is therefore confidently to be anticipated that the Chinese will be watching Iran vs election-year-USA with considerable interest and close attention.

The Iranians pose a serious challenge - irrespective of any baby nukes they may possess, which they wouldn't squander anyway.  Amply capable of 'conventional' fighting, they must also be the most potent initiator of asymmetric warfare on the planet right now (of which the cyber variety is just one facet**).  For one thing, the Chinese will want to see how the Iranian drone fleet fares.  Don't be surprised if it is swept from the field ... but to achieve that, the US will need to show its technological hand. 

Likewise, even the slightest escalation of violence will tempt Trump to take out the Iranian nuclear programme - but again, using what technology?  (FatBoy wants to know the answer to that one, too.)  More broadly, what means will the NSA deploy to intercept small-but-deadly operations against US assets the world over?  Or to blot out Iranian comms across the spectrum?

Finally, and on a different theme: high-profile conflict in one theatre has often been used as useful cover for some other party to have a crack at something they've had on their own list for a while.  I still don't think China will go for HK (see Predictions 2020 quiz, qn 5), still less Taiwan this year - even on a wet Thursday morning when all eyes are on a spectacular going down in the Gulf:  but Someone will try Something.

Have a nice weekend!  Oh - and I wouldn't be taking a holiday in Cyprus any time soon ...

** cyber is a game lots of folks might start playing, in the hope it all gets blamed on Iran 

Thursday 2 January 2020

2020 Predicitons

After last years frankly lame effort at predicitng, this year should be much easier should it not. First off all we don't have to worry about General Elections or whether the UK will leave the EU.

Also with the Corbyn terror seen off for a long time, gross mismanagement of the economy should be off the table...we hope!

So, with a slightly more normal year I am proposing a prediciton competition with a chance of some of us coming out with an above 50% hit rate on the questions...oh for the halycon days of 2011/12 where someone normally got 100% plus a bonus guess too. I look forward to a return to the past in this sense.

Here we go then:

1. What level will the FTSE end 2020 (this could be a bit risky if Boris somehow contrives a no deal disaster by the year end)?

2. Will we, as UK citizens, still have Freedom of movement within the EU for 2021+?

3. What percentage of electriciy will be on average generated by non-fossil fuels for the year?

4. What taxes will the new chancellor impose? Will there be any tax cuts in the March Budget?

5. Will China invade / occpuy Hong Kong fully?

One bonus guess allowed too?

Go for it people.