Energy Market Reform

Posted on October 25, 2013 by Doug King

This week’s news has been full of hot air about energy prices.

The Chief Executive of Npower suggested that consumers should use less energy if they want lower bills. Actually, that’s very sound advice, but it came on the back of the recent energy price hike and so of course the media and politicians have been up in arms over this ‘affront to the public’.

Shadow Energy Secretary Caroline Flint said that energy companies shouldn’t lecture customers when thousands are struggling with bills and Labour Leader Ed Milliband said that this was more evidence of ‘a broken market’ and reiterated his call for an energy price freeze.

Meanwhile the energy companies are desperately dissembling; trying to blame Government subsidies and levies for the price hike, when in reality these represent a very small percentage of bills. Maybe that’s what led to the spat between Deputy Prime Minister Nick Clegg and Prime Minister David Cameron over green taxes.

I guess that politicians and energy companies alike don’t want the public to know just yet that we are on the fast track to ever more expensive fossil fuel (see my oil price infographic) that will likely make the strike price for nuclear electricity agreed this week look like a bargain in 2023.

There is of course one simple measure that could be taken right now:

Instead of the cost of energy reducing as you use more, it should more expensive.

Imagine if the first 1000kWh or so of energy you used each year were free of charge. That would equate more or less to the winter heating allowance paid to pensioners, but would benefit all vulnerable households reducing fuel poverty across the board. Then the next 1000kWh would be charged to cover the cost of production, the next 1000kWh would cost more and so on. We could pitch it so that by the time you get to the UK average consumption the overall bill remains the same as it is now. Then the cost could increase rapidly with further consumption, allowing the energy companies to make their profits at the expense of profligate consumers.

At a stroke you’d address fuel poverty, rebalance the energy market, encourage energy efficiency and penalise the wasteful. This would re-balance the energy market in exactly the way that the politicians keep saying that they want to achieve.

So why are they not doing it? This is, after all, the way in which road duty is applied to cars – the more polluting the higher the charge, and council tax is applied to housing – the larger the home the higher the charge. Unfortunately our political parties of all shades are now firmly capitalist and rebalancing the market through taxation would be anti-capitalist.

The market will not deliver such change either, since no single company dare move to a new pricing system in isolation and concerted action by all the energy companies would be classed as collusion and anti-competitive!

It is not simply the energy market that is broken, it is our political-economic system.

Oil Price Infographic

Posted on October 20, 2013 by Doug King

Have you ever wondered why energy prices have It increased by 200% since 2002? I certainly have, and since I spent the afternoon crunching statistics I thought I might share my findings with you.

In the infographic below I have plotted the monthly spot prices for Brent crude oil and the UK quarterly figures for gross domestic product per capita. I have added a simple analysis tool, line of the peaks and line of the troughs, used by traders to estimate when a commodity is approaching its upper and lower price limits.

Until 2002 the oil price appears to be the product of a mature commodity trading market. The oil price is relatively stable showing a gradual increase in the peaks, but a stable floor to the price. GDP per capita in the UK grew throughout this period at a rate comfortably above the growth rate in oil price. The two exceptions to this are the 1990 recession, coinciding with a peak in price triggered by the Iraqi invasion of Kuwait and the Asian financial crisis which triggered a collapse in oil prices as supply outstripped the demand. Then there is another peak followed by the dotcom bubble. Co-incidence?

Don’t ask me what happened to change the nature of the oil market in 2002, I have no idea: I hope someone does, it looks like a completely new paradigm. Again using the lines of peaks and troughs we can identify trigger points. You can probably find other fits, but since the market appears to be starting afresh with nothing to go on it is likely to have been a volatile time. Nevertheless we can see how our economy has become increasingly sensitive to oil price. Not only that, but now oil prices are rising at a much faster rate than GDP. That must mean that we are in for trouble.

Data from the UK Office of National Statistics and US Energy Information Administration

Energy Incoherence

Posted on March 28, 2013 by Doug King

This has been an interesting month for revealing the effects of the lack of a coherent UK energy policy.

Three fossil fuel power stations have closed; Cockenzie in Scotland (1GW Coal), Didcot A (2GW coal) and Fawley (1GW oil). These recent closures bring the total closures since December 2012 to 7.5GW accounting for about 10% of UK generating capacity.

Didcot A Power Station These stations were built at a time when we didn’t recognise the damage that carbon dioxide does to our ecosystem, but we did recognise the importance of domestic industry. The UK had, and still has, extensive coal reserves and our power stations were built to exploit this and create growth in UK industrial capacity at a time of optimism.

The closures occurred not because the stations were failing, but due to European legislation on air pollution and a hike in UK carbon taxation. These stations could have continued in operation if pollution control had been installed, or until 2015 in any case under the European Large Combustion Plant Directive. However it appears that the majority of operators have chosen instead to run them flat out during the profitable winter period and shut them down on the eve of a new tax on fossil fuel. The ‘Carbon Floor Price’, to be introduced on 1st April, has a stated purpose of making fossil fuel generation uncompetitive. Congratulations Mr Osborne, you’ve succeeded!

In the same month, the UK’s largest remaining coal mine, Daw Mill Colliery was pushed over the edge of financial viability by an underground fire and closed. The price of coal on the international market has collapsed, pushed down by a glut of american coal caused by their rush to shale gas. Private electricity generators will of course buy coal at the lowest cost available, making the UK coal industry ultimately unviable.

A total of 1000 energy industry jobs have been lost in March.

It is estimated that despite the closure of the majority of coal power stations by 2015, our reliance on imported coal to generate electricity will rise by 70% as the UK coal industry collapses. Of course these power station closures will also increase our reliance on gas to generate electricity. We already import half of gas consumed in the UK and this is expected to rise to 70% by 2019.

We saw an example this month, coincidentally on the day that Didcot A closed, of our sensitivity to gas imports. The UK-Belgian gas pipeline suffered a fault in a dewatering pump and had to be shut down for half a day. During that period the price of gas jumped 50% to an all time high, as it became temporarily scarce. During one of the coldest weeks we’ve experienced for a while, our national reserve of gas was reduced to just 36 hours.

Surely a national energy policy should address energy security and jobs as well as carbon.

Government seems to be banking on new gas generation coming along to fill the gap until the new nuclear power stations come on line. However its policies are focused on renewable energy and its rhetoric is all about beating up energy companies to keep bills low. It has taken its eye off the ball with regard to energy security, jobs and UK industry.

We have a privatised, fragmented energy system whose individual players won’t make necessary investments in new capacity unless they are confident of a return. If Government will not give them that confidence through coherent policy then they won’t invest until market forces drive energy prices sufficiently high. Once electricity becomes a scarce commodity the price will increase, that is the way of the market. If the lights start going out then maybe Government will be happier to discuss the subsidies energy companies are asking for in the absence of policy, but of course, by then, subsidies will be unnecessary.