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Did you know this winter's household energy consumer has never had it so good? Ask Steve Holliday, chief executive of the National Grid.
He won't say so in quite those terms as he is more interested in making stern warnings about the bank-breaking investment we need over the next decade to drag the UK energy industry into the 21st century.
But he will tell you that the “reserve margin” — the amount of generating capacity over and above projected consumption — is at a 25-year high. It's the recession, of course. Consumption has plummeted 7%.
In such circumstances, and with wholesale prices falling because of over-supply of gas and electricity, a GCSE-level economist will tell you household energy prices should be coming down. They are not.
At an average of around £1200 a year, bills in fact remain close to all-time highs.
After this column last month harangued the industry for failing to explain properly why prices are not being cut and wondering whether the big six suppliers are acting as a cartel, gentlemen from the energy companies came knocking. They argued:
* it is they who are having to raise and spend huge amounts to secure the nation's supplies (building nuclear, gas and windpowered plants, upgrading networks or securing gas storage);
* it is the Government that has saddled us and them with aggressive carbon targets which means huge investment in renewables;
* the recession is bringing a rising tide of bad debts for retail suppliers;
* they have to forward-buy their supplies around 18 months in advance, meaning the energy we are consuming now was bought on the wholesale market at a time of raised prices due to security-of-supply scares and the soaraway oil price.
All of the above may be true. But if it is, then just how much profit are these supply companies making out of the consumer? As there is a depressing lack of transparency across this industry, we have but one benchmark: the nation's largest supplier British Gas. Its detailed published accounts tell you the answer is around 7% — or to put it another way, around £80 of your annual energy bills go to your supplier in pure profit.
Should we be outraged? That operating margin is a little higher than Tesco but quite a bit lower than what a BT or a Sky makes from you.
The issue is therefore this: does the amount of money we are being relieved of by our energy suppliers represent value for money? The regulator Ofgem is scaring the B'jaysus out of everyone by warning that household energy prices could soar by more than 60% in seven years: yes, the £2000 a year bill by 2016.
That worst case scenario envisages future supply shortages because of a strong rebound in the global economy and new nuclear reactors and windfarms not being being built because of a lack of financial incentives or because of planning or supply chain issues.
But the nub of Ofgem's argument is that, whatever happens, we will have to spend £200 billion to avert a supply crisis and at the same time hit ambitious carbon targets.
And the bill for that £200 billion of expenditure will be paid by you the consumer in higher bills.
The Department of Energy and Climate Change hates this because it lets the cat out of the bag and rather points the accusing finger over how in the last 12 years this Government got us into this situation.
The energy industry, of course, loves this Ofgem version of apocalypse for it is a green light, if you will, for keeping prices high. So it looks like this winter's energy consumer, and for winters henceforth, have never had it so bad.
Yet should we believe a word anything this less-than-transparent industry is telling us? The biggest component of our energy bills, around 50%, is the commodity price. Energy procurement experts say there is sound evidence that the suppliers have at best been hopelessly conservative in their energy-buying thereby artificially inflating the wholesale prices they are paying and passing on to the consumer.
The largest rising component of our energy bills is investment in renewables. But do we know whether the energy companies are spending wisely or whether they are being ripped off along the supply chain, again artifically inflating costs that are passed on to the consumer?
Ofgem, guardian of the consumer interest, has made it plain that in a liberalised energy market it is we the consumer that has to foot the bill.
If it were taxpayer money at risk the National Audit Office would have been called in long ago.
If the regulator is unable to show we are getting that value for money then it is about time the auditors of the NAO were asked to embark on a root-and-branch review of this whole industry.
Reader views (1)
According to Ofgem, all six of the suppliers, despite being professional energy experts, had the great misfortune to have bought gas at the same time at the height of the market. Is this really plausible? Perhaps this awful misfortune did befall them, but then how did they all increase profits? Iberdrola, owner of Scottish Power lost a lot of money due to falling demand in it's Spanish market, but seemed to discover the business version of cold fusion in Scotland: Have less customers using less product and increase profits. We need an investigation, and need a regulator more concerned with millions of voters than the "commercial in confidence' excuses of six companies (only 2 who are British).
- Gas Guru, London, 15/10/2009 13:42
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