Night of the Evil Price Rises…

An energy company gives a customer a helping hand

Last week in Parliament we debated energy prices… for a whole afternoon.  I had the mixed pleasure of sitting through most of the debate and said my piece in the fullness of time (if you must, you can look it up here).  A lot of sensible things were said, but around them swirled some propositions that at different ends of the argument looked distinctly flakey. One was that energy companies are somehow really evil and that they are engaged in some sort of conspiracy to put prices up and snaffle the product of the rises in an underhand way. As a result, prices are way above what they should be. Another was that the answer to energy price rises lies in the performance of some essentially trivial actions that would, in the doing, essentially ‘fix’ the problem. A third (perhaps not so flakey but equally contentious) view was that energy markets have somehow been ‘rigged’ to produce unpalatable results.

Those canards will do for a start, and need putting to bed (forgive, for a moment the extreme mixed metaphor of a number of tired ducks being tucked up under duvets). Well… surprise, energy companies clearly aren’t particularly evil, and a number of them have carried out some very useful energy saving and anti-fuel poverty programmes, sometimes heavily guided by the regulator and legislation, sometimes hardly at all. And by and large energy prices are probably not hugely above where they might otherwise be. Particular features of the market (gas being the market maker, for example) allow for profit taking where markets are volatile, and for the ‘rockets’ and feathers’ effectof the speed at which retail prices rise and fall on wholesale price changes:  but in the longer run retail prices are not way out of kilter with supply prices.

Second surprise: the various wheezes being touted currently (switching, tariff information etc – see energy summit passim) will make in reality virtually no difference to price rises or their trajectory, especially in a world where primary energy prices remain on a fairly remorseless upward spiral. They are mostly, with the notable exception of insulation (if it can be afforded) placebos in the medicine cupboard that look good, perhaps have an effect if you believe in them, but essentially contain candy and chalk.

As for the market being rigged, well yes it is, but it was ever thus, and this is the route to getting a better grip on the problem, I think. Markets have been rigged because electricity and gas supply is essentially an activity that is intrinsically monopolistic. Creating competition for something that comes out of a socket or a tap in the same form and to the same standard wherever you are and whoever supplies it is a very big problem. The default position of energy supply is monopoly.  You have to do some pretty substantial rigging to make a market work at all, and it needs heavy and continuous regulation to keep the rigging in place.

Before the current ‘NETA / BETTA’ energy trading system we had ‘the pool’. That was poorly rigged because it was an incomplete fit between supply and demand management, and because a large component of its activity (nuclear and coal supply for example) was heavily subsidised before any trading had taken place. The current market is poorly rigged now because no account was taken at the time of the introduction of NETA ten years ago of the inherent likelihood that the companies involved in trading wholesale ‘clips’ for retail supply would vertically integrate their operations, trade mostly with themselves in the futures market and defeat the supposed central mechanism of trading transparency.   Or, indeed, that they would all progressively apply the same hedging techniques to price uncertainty, so that one price rise becomes inevitably, a rise for all.  That has occurred, not because the companies are evil, but simply because they behave like companies do when faced with an inherent monopoly set-up and relatively flimsy defences being erected against it.

Put simply, if we want prices to look and be fairer, reflect justice in usage, and reflect better the relationship between wholesale and retail price, then we will have to do what has been repeatedly tried over the years with varying degrees of success: that is: rig the market better so that this result is more likely to occur. That means a better trading system that starts with current reality and not a mythical ‘level playing field’ of a myriad of large and small producers and retailers, all jumping in together.  A modern ‘pool’ (I think probably of the ‘single buyer’ variety) probably represents the best go at making a very poorly functioning market more predictable and transparent, and hence will have a stabilising effect on the whole edifice of pricing. Rigging the tariff structure so that you pay less for lower usage rather than more will add to a perception of fairness in pricing. And finally, we’ll have to decide just how much public money goes into this rigging, just as we have already, and quite rightly decided on a continuing underwriting from the public for environmental and climate change measures.

And by the way, at the end of all this, it is unlikely that prices will drop significantly, and nor will such mechanisms in themselves address the pressing issue of systematic fuel poverty as a result of price levels.  But we may be able to get to a position where we insulate (pardon the pun) ourselves better from shock rises; really do reward lower energy usage; and where prices look clearer and fairer for all customers.


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