What a staggering day yesterday was. The hyperbole around domestic energy price rises rarely disappoints but the crescendo reached yesterday was … well frankly unbelievable.
If reports are to be believed, the PM, somewhat off guard and certainly unexpectedly said that the government would be “legislating so that energy companies have to give the lowest tariff to their customers”
As customers we might interpret this as good news
As businesses we would certainly interpret this as the government nationalising privately owned businesses. Invisible hand? More like clunking fist.
So let’s just break a few things down:
Firstly the intent of the phrase “Energy companies”:
Is this the Big 6?
Or is it just the Big 6 who have generation capacity to fulfil their supply needs?
Or the Big 6 who have to actively operate in the market to supplement their supply needs?
Or does it include the independent new entrants without any generation assets?
Or how about those independents that are investing in renewable generation to support their customer base?
Or what about the huge multinationals that though operating in the market with abundant generation resources don’t have the portfolio to worry the populist press (yet)?
My point?
Energy suppliers are not all the same, don’t operate on the same commercial terms and play very different roles in the market.
Secondly, the phrase “lowest tariff”:
Firstly what do they mean by tariff?
The answer would I expect be “the unit price the customer pays” but lets step back and look at what the suppliers are actually in control of in that tariff:
• wholesale energy costs make up around 57%
• transporting the energy is around 15%
• losses through inefficiencies in the system are around 7%
• additional industry costs for the network are around 1.5%
• government initiatives (taxes to you and I) make up 3.5%
• metering provision makes up 8%
• and the supplier has a gross margin estimated around 8%
So if they have 100% of their generation covered by their own assets you could say that the energy company controls 65% of the cost of energy – their energy costs and their gross margin.
If in their group they own the metering there is another 8% to play with too.
But if they transact in the market for their entire generation needs their ‘control’ is a miserly 8% to cover their total operational overheads as well as returning some form of profit (and cash flow).
OK this is quite extreme and there is every combination in between these examples and in addition different ways an energy supplier can optimise their earnings but it is pretty stark that this isn’t the simple game the commentators, government departments and politicians would like it to be.
The second point on “lowest tariff” is the economic sensibilities of it, or in other words what will happen if lowest price is mandated?
It doesn’t take a trained economist to work out that the lowest price will rise to a level where profitability is retained, and therefore costs will rise for everyone, all the time.
If a supplier should take a principled stand and actually follow the lowest price mantra and run their commercial offering accordingly there is real danger that that business will place itself in a precarious financial position.
Boo hoo I hear the cry, but do you really think it will be one of the big 6 that does this?
Of course not it will be an independent, new entrant supplier who will inevitably exit the market under such a strategy and as a result will impair competition for good.
The more I sit here writing this the more I marvel at the madness of it all, but there is a side of me that understands where they are coming from, it’s just that this sort of unthinking pronouncement does not help.
We’ll hear lots of bleating from the energy companies themselves and sympathy will be in short shrift but looking at this dispassionately and objectively it is impractical, illogical, unworkable and ultimately will leave the customer worse off in terms of competition and the price they pay.
The answer? Whether some of us like it or not we live in a world of private enterprise and competition, otherwise known as capitalism.
It’s the energy companies right to charge what they want to recover the costs of their investments and to return value to their shareholders.
It’s the same with each of us, albeit I don’t doubt on a significantly smaller and less bombastic basis.
It’s the system, but the system is ‘designed’ to reward winners and deprive losers, in that sense we, as businesses or consumers, can choose our winner and reward them with our business.
The answer isn’t therefore in some highfaluting unworkable concept (which industry will feel the dreaded iron fist next?) it is in exercising your right to switch whether domestic or business energy.
As with everything in life, remain passive and things will happen around you, be active and you will make things happen.