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Scottish Power Announce Domestic Energy Price Cut

Scottish PowerIn the latest tediously predictable news from the domestic energy market, as forecast earlier today, Scottish Power have, as all the domestic Big 6 suppliers do, behaved like the proverbial sheep, followed the flock and reduced their prices by 4.8%.

Have you ever herd anything so ridiculous?

Well yes actually we have, cue Red Ed Miliband’s latest outburst:

“A 5% fall is too little and it is too late. It is not nearly good enough.”

“If the Conservatives want a competition about who can properly stand up to the energy companies, I say bring it on.”

“This Government has stood by as energy prices have gone up and up and done nothing about it.”

But the myopia and tub thumping of the Commons doesn’t stop there with Danny Alexander and George Osborne joining in the madness.

Alexander told The Daily Telegraph:

“Now [some] of the Big Six have announced price cuts I am looking to the others to follow suit and to do so quickly.

“And whilst any price cut is welcome, consumers will be expecting more cuts as the wholesale gas price has fallen very significantly in recent months. I am pressing every company involved to make sure that they strain every sinew to get their prices down soonest.”

Whilst Osborne, already chastised by Ed Davey for his inappropriate pronouncements again said:

“I’ve made it clear that falls in energy prices must be passed on to customers and it’s good news that progress is being made. But there is further to go. We need to ensure falls in wholesale prices are properly passed on to all consumers and we will continue to monitor this very closely.”

This is not helpful. Not helpful at all.

Nobody likes paying for something that isn’t a luxury or a treat. Even then people want a good deal. If people are constantly being told that what they are being forced to pay is too much and that they are forced to pay it the atmosphere around the transaction will be toxic. And if the people who are saying this are fundamentally misunderstanding the market. And if these people have ulterior motives (getting re-elected, getting switches on their price comparison sites) then we have a problem. A problem of honesty not price.

We’ve said already the energy market needs a grown up debate. We are not getting that.

Quite simply the suppliers in the domestic market are smoothing out the worst excesses of the wholesale energy market.

In doing this they are naturally buying energy at a price and volume ahead of time with a view to creating some level of certainty for themselves and their customers.

In doing so wholesale price falls will naturally not see immediate reflection in the retail price. This apparent opacity does provide opportunity for suppliers to optimise profit, but that doesn’t mean the sensible alternative is an immediate pass through of the wholesale price to consumers.

If it did we’d have some very worried domestic customers. Take the volatility in the gas and electricity market over the last week. Prices falling? Yes. Prices predictable? No.

As the above illustrate, even if the market overall is falling from point A to point B that does not mean it’s an inexorable flat line, linear decrease.

If the wise men and women of the Commons and the Price Comparison Website purveyors insist on a direct relationship between the retail and wholesale price then the price domestic customers will pay will quite frankly be unpredictable, volatile and require almost micro-management.

How do we know? Because that is how the business energy market works. The difference though is that the business energy market and business energy customers are prepared for this and understand that the cost of their electricity and gas is directly linked to the movement of the wholesale market. As such there is always an opportunity to strike an advantageous deal as much as there is a risk of getting your contracting decisions very wrong.

The beauty of the business energy market is that long term, fixed price contracts are the norm. That is not the case in the domestic market, long term is maybe 14 months, fixed is only for as long as it is.

Because of that reduced certainty energy suppliers in the domestic market buy ahead, smoothing out the price differentials but also insulating the price from the movements within the market.

The alternative, the solution the politicians and price comparison websites want is a great deal less attractive in reality than the soundbites they are so quick to proffer.

A volatile wholesale market, passed directly through to customers, up or down, is a recipe for disaster.

Add in the much overlooked fact that just 12% of the energy price goes to the energy supplier whilst nearly a third filters to the government through tax, the true picture is very different indeed.

That isn’t to say there doesn’t need to be more transparency, that isn’t to suggest that energy suppliers are entirely free of profit optimisation, but it also isn’t to say that the iron fist of state intervention is the answer.

Not by a long shot.