Monday 22 August 2022

Ofgem: price cap + a very unusual resignation

In my experience, the reasons for someone resigning are rarely revealed by the ostensible account.  Sometimes they've actually been fired.   Sometimes they were at the end of their tether - maybe out of their depth - and looked for some convenient pretext, or picked a fight on a semi-spurious 'point of principle'.  Sometimes they are just one of life's serial resigners with a track-record of flouncing off.  And sometimes, I suppose, the whole thing should be taken at face value.

Anyhow, last week there was an interesting one: "Ofgem director Christine Farnish resigns over price cap change".  Who she?  Good question.  Is the precise mechanism of the Ofgem price cap a resigning matter?  Well, it's incredibly technical, as a glance at Ofgem's many publications on the topic indicates: a helluva balancing act in fraught circumstances, with lots of competing strategic desiderata in play.  Only Theresa May ever wanted this cap thing, and the weight now resting upon it is wildly more than it was ever designed to bear.

The underlying complexity is a genuine one: what should be the hedging strategy of a utility supplier in ultra-volatile market conditions?   An answer to this is required because the price cap logically needs to take it into account.  What's being hedged is technically a short option - always ultra-problematic.  There's no single "right" answer, not least because high volatility (and we are talking off-the-scale vol here) is naturally accompanied by thin liquidity in the hedging markets, and acute pressure on lines of credit, all for very logical technical reasons.  In case anyone imagines there's an element of crying wolf here, just consider the number of suppliers who've gone bankrupt or otherwise exited the market in the past 12 months.  Much of that was Ofgem's fault for licensing minnows in the first place, but Bulb (e.g.) isn't in that category and Bulb is languishing under state control at the expense of all of us.  The government, for one, has no idea how Bulb should hedge, and so it ruled that it wasn't to be allowed to.

For those interested, there's another technically fascinating phenomenon at work in the hedging arena: backwardation in the gas market.  This is where the forward curve is trading at lower prices than the spot market - generally not something seen in the gas market, except ultra-fleetingly**.   But since last year when this whole thing kicked off (starting in the Far East - see this blog from Feb 21 - long before Putin played his hand about 12 months ago, but made much worse by his subsequent actions) there have been unprecedently sustained periods of deep backwardation.  This, incidentally, is the only reason the big players like Centrica are still alive and kicking: they've been able to lock in at prices they are fairly sure will end up looking OK, relative to spot prices.  They may still have had to take the risk of an open long position for quite a while, however.   The small players might have wanted to go the same way - but didn't have the credit standing to take on the same position.  The strain on even Centrica's lines of credit is enormous.

The last 8 weeks have seen astonishing movements along the forward curve - prices for calendar '23 and '24 have more than doubled.  Even with this, there's still a degree of backwardation.

I don't know if the "£6,000 price cap" forecast is warranted - putting numbers on predicted commodity prices is a mug's game; and I've no idea who "Auxilione" are, except that they seem to be attention-seeking.   (As an MP acquaintance of mine says, you can always get on the news if you are willing to take your trousers down in public.)  Doesn't detract from the difficulties ahead, though.

But resigning over the technicalities of the price cap?  She should have done that a long time ago: it's been a can of worms since the very start.



**There are all manner of pseudo-science theories about this - e.g. "backwardation can't ever be sustained in the gas market" - but, like econometrics in general, they are mostly bullshit 


James Higham said...

She seems to have resigned on principle. Then again, she's 72.

rwendland said...

> Only Theresa May ever wanted this cap thing, and the weight now resting upon it is wildly more than it was ever designed to bear.

It's all a bit hazy in my mind, but my recollection was the cap was introduced because retail energy companies were excessively gouging customers who never switched, and were still on standard variable tariffs nearly 30 years after privatisation. And also those who forget to switch promptly at the end of fixed term contracts who got switched to SVT. Contrary to theory, not every consumer is an economically astute and alert actor.

I remember thinking at the time it was a crude approach, perhaps some relative price cap would be better, but essentially a good thing. And the companies only had themselves to blame for bringing it about.

Digging around it seems there was a letter from 70+ Conservative MPs, and about 120 other MPs, demanding something like it, so not just May. Apparently at the time "two-thirds of Britons are on [Standard variable tariffs]":

jim said...

This lady has a track record of being kind to pussy cats and consumers. Quite probably OFGEM is stacking the odds against the consumer, after all where else is the money coming from and OFGEM will have some very ratty bosses once the winter gets going.

So get out of the ordure firing line and get lined up for some other customer protection wheeze. Some customers seem encouraged to be foolish or brave enough to withhold payment. A few can easily be picked off, large numbers with good publicity will make things warm for HMG and OFGEM. Customer protection may be the next big thing. Better off outside the tent pissing in maybe.

Anonymous said...

OT but an interesting Russian insight into the air war in Ukraine. Not my translation.

"And suddenly, somewhere at the turn of April-May, everything changed.

Now we can quite calmly say that it was in early May that the United States and its NATO allies began to fight on the side of Ukraine.

There, across the ocean, they assessed the efforts and combat capability of the Ukrainian army, and since it was not possible to put the Armed Forces of Ukraine in a certain uncomfortable position in a month, since the war continued in Western brains to the last Ukrainian, our potential opponents decided to start supporting the Armed Forces of Ukraine, thereby entering the war on their side.

Let me give you one more quotation from our past.

“If we see that Germany is winning, then we should help Russia, and if Russia is winning, then we should help Germany, and thus let them kill each other as much as possible. But under no circumstances do I want Germany to win."
Senator Harry Truman, future US President from a speech on June 23, 1941

Translation, I think, is not required. Everything is exactly the same.

Instead of the destroyed radar stations and air defense command posts, American means of airspace control took over their role. We already know the role of AWACS aircraft, which are on combat duty in the air almost around the clock along the border with Ukraine. And besides AWACS, there are also heavy reconnaissance UAVs, there are also satellites in near-Earth orbit, radio interception facilities located on the territories of neighboring NATO countries such as Poland and Romania. In general, a whole system for collecting data that was transmitted to the command posts of the Armed Forces of Ukraine.

That is, the Armed Forces of Ukraine received a luxurious gift from NATO. A well-established and stable information surveillance and tracking system. I am sure that as soon as a pair of Su-34s in Voronezh take off from the runway, a signal is sent from the satellite to the appropriate satellite information processing center, say, on the island of Maui (Hawaii), which is processed and transmitted further.

It is clear that Ukraine was included in the NATO information network, and from the corresponding information processing center it very quickly gets to the Ukrainian military.

That is, it turns out a very unpleasant situation for our pilots: the planes are flying, the observation and detection devices of the radar are silent, but the planes are visible to the enemy, who is practically aware of where the “dryers” are flying.

And the radars of anti-aircraft missile systems are extinguished and do not reveal themselves in anything. They are simply not needed, they even do damage by unmasking the air defense system. Target designation is practically issued by the Americans and air defense systems fire missiles "in the dark."

Western aerial surveillance systems track the movements of our aircraft, and as soon as they (the aircraft) are over the areas where the Ukrainian air defense systems are on alert, the air defense systems simply receive direct target designation. Azimuth, altitude, speed, range to the target. Moreover, for modern American means of tracking and identification, it is absolutely not difficult to determine the type of aircraft.

The calculations of the air defense system absolutely do not need to turn on their radars to determine and identify the target, the Western allies have already done everything for them. The air defense radar is switched on at the very last moment, for the minimum time of approach to “illuminate” the target and guide the missiles."

Nick Drew said...

And not just air movements

There is, however, something else that can be detected coming over the horizon


Not sure that Liz Truss has noticed

Anonymous said...

Yes, I'm trying to knock together a spreadsheet showing the costs of say 100kw hours of heating (say a 2-bar fire for 5 hrs over 5 days, 12 hrs over 2 days - which from my childhood I can remember doth not a warm house make when its 0 outside)

For oil/gas/electric.

2 of my kids live in flats with only electric heating, one up north and one in Scotland. Time to invest in pullovers/onesies/fingerless gloves.

What are HMG going to do when all the care homes get large 5 or even 6 figure heating bills? Old people need a lot of warmth. As for the young, they'll either spend all their money on heating or discover things that granny used to talk about like "chilblains".

I must say this government has been far worse than even a pessimist could have hoped for. We're being impoverished daily while importing bucketloads of Nigerians and Pakistanis, who've done such a good job in their home countries, and we're sending vast amounts to defend Ukraine, while unable to defend our own border at Dover against Albania.

Do you think a few hundred thousand Albanians are a good idea?

DJK said...

Meanwhile, over at the Telegraph, Liz Truss is boasting that Britain has given more aid to Ukraine than any other country in Europe, and although we're in for a tough time this Winter, we can't afford to waver in our support.

"However long it takes, a Ukrainian victory is in all our interests." she says. I'm curious, what does Liz Truss think that a Ukrainian victory looks like?

Caeser Hēméra said...

@ND I'm hoping we don't get a bad winter, as things stand Truss' first few months is lining up to be an almighty battle to get her tax cuts through with little to no thought given to anything else whatsoever.

It's looking like we'll have a bad flu season, and if the weather is poor we'll be getting blackouts and brownouts, and inflation is rocketing.

Tax cuts are nice, but we've currently bigger fish to fry, a sizeable portion of the population are going to be unable to pay their fuel bills, a lot of businesses are going to go to the wall, tax cuts or no, and the NHS is tottering.

We've heading into this storm utterly leaderless for weeks, and now we've got Cap'n Truss in her pedalo coming on board. Thankfully we've quite the versatile word in "fuck", as it's going to be getting quite a bit of airing over the next few months.

I'm very much hoping Truss will be serving me large portions of humble pie, but I can't see may bookies giving good odds on that.

Anonymous said...

Boris' trip to Ukraine today is going down like a lead balloon with the Mail commentariat. Top 3 comments

"Get back to work on the cost of living, instead of these photo opportunities, useless absolutely useless."

"While Boris living out his Churchillian fantasy, he shows no interest whatsoever in the cost of living catastrophe destroying England's way of life"

"When is he going to make a surprise visit to Dover to sort out that mess now that we've taken back control?"

Meanwhile it seems a natural gas version of OPEC may be on the horizon:

Anonymous said...

Cesar - there need to be emergency tax increases - and big ones - for high earners and on company profits (to catch people domiciled in Monaco).

E-K said...

One factory owner in the Metro paper today says his gas bill is rising from £1 million to £5 million and that he will go bust.

70% of pub owners saying they cannot survive winter.

We are fucked. Well and truly.

DJK said...

Boris has just said that we'll just have to put up with higher energy bills to counter Russian aggression. Doesn't sound to me like an election winning soundbite.

lilith said...

Bakery said their bill would go up from 25k to 125k....can't see people forking out £20 for a loaf of sourdough even if would cost pretty much the same to bake it themselves...People will not be able to pay. People are struggling already. They couldn't afford Netflix or takeaways in the first place. What should they cut back on? Rent? Food? Travel to work?

lilith said...

The NHS has already made clear it doesn't want us bothering them this winter. The last thing they want is a several million strong wave of hypothermic malnourished folk who have been subsisting on shoe leather and iceland pizzas and using candles to keep warm. I fear for the much reduced fire brigade and that swans and duck will be extinct in the UK by next April....

lilith said...

I suppose it could sort the pigeon/seagull problem however...

Matt said...
This comment has been removed by the author.
Matt said...


Cram your tax rises up your arse. We need some real change in the way the country is run and passifying the proles with my hard earned cash won't get that done.

Anonymous said...

The tax rises aren't for pacifying the proles. They'd be part of Project 1970 aka Project Wilson.

In 1970

1/ we actually made things - Finance/Insurance/Real Estate was only a part of the economy
2/ we didn't follow every US war - no troops to Nam
3/ housing and energy were affordable
4/ top tax rates were pretty damn high, I wouldn't go that high. But what we've got now is the result of 50 years putting the FIRE sector first. FTSE 100 directors get 40% rises on already insane incomes, we get 10% cuts. And they spend the money on properties.

I'd stop companies owning residential property to start with, and restrict individuals to 2 max, and even then the second couldn't be in an area where average incomes couldn't buy a house (like Pembrokeshire/Cornwall). If Sting wants a London pad he can rent!

(I'd also send every Dover arrival straight to Africa - or maybe the Falkland Islands)

Matt said...

So what are the tax rises for? To address inequality by battering the incomes of the better off to match those of the poor? Or perhaps for the government to spunk by choosing winners with some half-arsed industrial strategy?

E-K said...

Lilith - Segulls are chewy, oily and gamey and taste very unpleasant. Best to eat those living near the sea as they are the ones most likely to have survived on fish and muscles but they will still be very dissatisfying. They are high in protein, low in fat, produce small fillets and probably cost more in energy to capture and eat than they yield.

If you caught one in my town there would be a subtle hint of Greggs fused with kebab in the meat. East meets West. In London it's Greggs fused with KFC.

lilith said...

Ewww E-K! Luckily we have plenty of deer around here...for the time being :) although if push comes to shove our dog is an excellent ratter...