Freezes, geeks and voltage optimization.

I’m back from several days at the Labour Party conference, spent largely, I must admit, at some of the less obviously crowd-pulling fringe meetings and roundtables that conference always features, including a memorable and detailed exchange with a delegate on the subject of ‘voltage optimisation’. I know, ‘return to your constituencies and prepare for voltage optimisation’ doesn’t quite have that winning ring to it, but now that ‘geek-Ed’ has shed his mantle to morph into ‘he-man Ed'(by the way, you might like to have a look at Steve Bells comic strip in today’s Guardian to see how it was done….) there is clearly a big geek-space opening up.

So here’s a small bit of geekery on that commitment in Ed’s speech – you know, the one on freezing energy prices for twenty months when the next Labour government comes to power. I’m a little surprised at the overblown reaction from some, at least, of the big six energy companies on the specific point of a freeze. No-one likes having a potential profit line removed for a while, that is true, but no, of course, the imposition of a price freeze will not cause the end of energy investment, blackouts, companies closing down etc etc. It is, in itself a re-run, with similar justification and possible overall financial effect to the ‘energy windfall levy’ imposed by the Blair Government shortly after it came to power in 1997. That levy raised about £5 billion with no terrible consequences for anyone. This price freeze might produce the loss of about £4.5 billion in unsecured income for energy companies, depending of course, on what wholesale prices do in the meantime. Although some of the wailing may have to do with the fact that some companies have, in effect already staked out their outline price position by buying very far ahead of the curve in the gas market, and may find it difficult to adjust should the freeze go ahead.

This proposed freeze is different, however, in that it impacts at the point of the energy bill, and not when the balance sheet is totted up. And, of course it is quite explicitly part of a wider approach to energy markets, as Damian Carrington notes in an excellent blog piece in Guardian Environment.

That wider approach is signalled quite clearly in the letter to Energy companies from Ed Miliband, following the announcement of the freeze. ‘It means’ he says ‘ensuring that that, in the time taken to put a new system in place up to the start of 2017, we ensure that prices paid by consumers do not rise’.

Although it’s a bit sketchy right now, that ‘new system’ would, or could include the establishment of a ‘pool’ trading system (including transparent buying and selling of energy right out along the curve so that netted off arrangements and similar would not be possible). And also the break-up of integrated company structures, probably into free standing retail and generation arms for at least the ‘big six’ (but less clear about other ‘integration’ such as DNO ownership). So the price freeze would essentially be to hold the retail market in place whilst those changes take place, which themselves have implications for price maintenance for the future. Just freezing prices for twenty months makes little longer term sense unless there is something to follow it. Otherwise, prices simply pop up to compensate for the hiatus in rises. So the establishment of retail-only companies would have to followed by a price formula arrangement similar to that for water and rail and a new Ofgem would have responsibility, one might imagine, for future r+ and investment arrangements for those companies.

And then a further question arises. Should those far smaller companies with small asset bases expect to continue to take responsibility for the roll out of smart meters. The far larger, asset-rich generation companies arising from the previously integrated big six could, but as generators would have no standing in the process. Might District Network Operators (as I have long advocated) step forward to do the job far more simply and effectively, at that point?

So what energy companies are far more likely to be seriously alarmed about is this logical train of implication, not the price freeze itself.  And that is, in part because the combination of the price freeze and other measures does indeed break the implicit ‘don’t rock the boat’ truce on wider energy measures that has hovered around the increasingly drawn out and unsatisfactory nature of the design and implementation of Electricity Market Reform.  It will be difficult to make these larger processes work alongside each other, of course, since the early effects of much EMR implementation (the operation of early investment instruments, for example) will work, or potentially, fall to pieces in the region of the twenty month ‘window’ Ed Miliband sets out to make the changes within. And because of that now badly trailing process, it can be argued that there will never, or only in the distant future be a good time to implement measures outside the key changes of EMR itself. Whether you believe in the completeness of the those further measures or not, that is what Labour is now trying to do. It is seeking to remedy the glaring omission in EMR, namely that it doesn’t reform the market itself.  And I think it’s probably this that those who have become used to surfing on the way the market works at the moment are really upset about.

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