I had real problems listening to an interview on the Today programme this morning. I think it was John Humphries interviewing a person from Scottish Power on their reaction to the cap the Tories are proposing on household energy costs.
The interviewee had much to say on the value of competition. He struggled to justify why it did not work meaning so many people are on tariffs that are more expensive than they need. But what really annoyed me was his continual reference to the customer buying the wrong product.
My aggravation was based on the fact that he so clearly did not understand what the product his company sells is. That is electricity and gas. And as a matter of fact whichever tariff a person is on from whichever company it is with identical electricity and gas arrives in their hiusehold through identical wires and pipes. Quite literally nothing whatsoever about the product that is consumed changes when a consumer changes supplier of tariff.
The Scottish Power representative was so far removed from the simple realities of life that they had obviously forgotten this fact. If he had noticed it what he would realise is not that he sells a product at all: electricity and gas sell themselves. Instead what he sells is differentially priced access to that entirely homogenous product at the point that it arrives in the consumer's house. And what he also ignored was that without that differential, and the ability of his employer to exploit it for gain, there would be no profit for 'competing' companies in this market.
What this also then explains is why a cap is not what is needed. That still permits differential pricing. What is needed are tariffs designed to deliver an essential and homogenous product to the consumer without excess profit being extracted from them.
And it's not at all clear that any tinkering with the current supposed market can achieve that, largely because the market is not in the product in the form of gas and electricity at all, but is in contract differentials that can only pay a return based on exploitation of some at least.
In that case something much more radical is required.
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Are we to assume that your radical solution would be for a single body (perhaps Government) to take over responsibility for both the generation and distribution of household energy ?
Is that radical?
Excellently put Richard! The notion that electricity is a commodity like any other and involves the same process of competition that is involved in the production of a vacuum cleaner or mobile phone is risible and part of the ‘commodification of everything’ that we’ve experienced over the last 40 years.
What also needs tackling is the sheer complexity of tarrifs and the difficulty of navigating the system to avoid being siphoned yet again. a few weeks ago I was aware that SSE were about to hike the price although they were reluctant to tell me much over the phone (I suspect the operatives themselves don’t know). In the end I managed to avoid the hike by locking into a two year tariff just before the 14.9% rise. But it was no mean task doing this: I spent nearly an hour on the phone going through options with different night time rates and standing order and often had to insist that they did the calculations for me instead of leaving me to sweat it out -they had to be asked on everything with now real advice/information being given unless you insisted on it. It left me with the impression that unless you had lots of time and patience and were prob ably retired it would be a tall order to get a handle on it.
I suspect many are simply too stressed and confused to deal with this stuff and end up getting catheterised yet again.
Privatisation of electricity and gas might have worked in favour of the consumer – if only power companies were like supermarkets. But they’re not. Like you say, what they supply is an entirely identical product. It would be like Tesco and Asda selling nothing but identical tins of beans. If they tried to compete, pretty soon one of them would be out of business.
So what power companies do is confusion marketing :the activity of selling products or services together in a way that makes it very difficult to decide which company’s products or services are cheapest. Complicated tariffs are not an accident. It’s so people are under the illusion that they are comparing a range of products as they would in a supermarket.
We do need something radical, and taking back into public ownership something that is a natural monopoly is one option. However, given that the big six power companies own more lawyers and politicians than we do, there is a better option. To sell gas or electricity you don’t need much more than an office, a phone, a website and a bank account. Then you out-compete them.
This already happens in Germany. Regional and urban authorities now supplt 50% of household electricity. And here in the UK, it’s started too. For more info see https://weownit.org.uk/public-ownership/energy.
I like it….
That’s revolutionary marketing
‘To sell gas or electricity you don’t need much more than an office, a phone, a website and a bank account’
And the capital to purchase the electricity in the wholesale market to distribute to consumers comes from ?
Securitised customer debt
Thanks for that excellent weownit link.
News to me, and very important news!
Securitised Customer Debt ? Forcing people to borrow to pay for their utilities in order that their debt can be securitised is certainly a radical solution.
Who do you envisage undertaking the securitisation process, because that appears to be encouraging the participation of the financial sector in the process, which I thought was being discouraged ?
Securitised debt is raising capital on the basis of the sums customers owe
The customer is not part of the process
I am aware that the customer is not part of the securitisation process, however who are you providing the ‘capital’ to so the energy can be purchased in the wholesale market ?
It is certainly an interesting solution, but who do you also envisage managing and executing the securitisation process ?
The supplier of the energy securitises the debt
That was the answer to a question I was asked
It is, of course, not the only available one
A cooperative with a loan capital structure is another
I hope you will excuse more questions, as this is an interesting subject.
So if I understand correctly, the suggested funding model (lets use the supply of electricity) would be either:
1) A ‘Supply Company’ supplies power to consumers, who then accrue debt to that company. The ‘Supply Company’ securitises those customer debts, sells this security, for which it receives cash to pay National Grid for the supply of electricity ? So the holders of that security assume the risk for the repayment of the debts by consumers.(As those debt repayments will provide the return to the investors)
Or
2) a Co-Operative would borrow money to purchase power from the National Grid, which it would then sell consumers. Presumably in this model, the payments received by the Co-operative would then be used to repay the lenders to the Co-Operative ?
Is it assumed that this model would be better than the present solution because the co-operative would not be looking to make a profit ? (They would however I assume have to pay commercial terms for the original loan taken out, which would mean customers having to pay some sort of premium over the base cost of the wholesale electric supply, and to cover the costs of the running of the Co-operative) ?
It could just be a community owned energy company as well
I am not being prescriptive
There are many models out there
I am just making suggestions – not seeking to provide expert answers
The product to an environmentally aware consumer is not identical, if you prefer green energy then your choices are limited to a small number of providers like Blurb, Ovo, Ecotricity and how well they deliver on their promise of renewable energy. I’d agree that the actual product (electricity, gas) has no quality differences so it’s the ‘same’ in this way, but not in terms of its product cycle. Energy companies are ripping off customers who don’t switch on an annual / three-year fixed rate energy contract basis, and it creates a massive hassle and wasted time and energy from otherwise productive work that I could be engaged. Also people who don’t have time, knowledge of these contracts, especially the elderly citizens don’t know how/when it’s best to switch. I’m facing my annual “switch everything you” time now, internet, gas/electricity, mobile phones (never on contract), home insurance. I should be mobilising on a general election, and fighting a hard brexit rather than this (maybe that’s the point). Energy privatisation without proper regulation won’t work for any consumers.
Strikes me that this is just the old fashioned natural monopoly that was in A level text books when I studied A level Economics back in the late 1980s so said that something like that is now seen as radical and outside the mainstream of thinking. Water, Electricty, Telecoms network (openreach), railways gas etc. should all be nationalised and would be if we weren’t driven by the dogma of public bad private good.
Totally agree – it’s not hard to see.
So how did we get to this point where the nationalisation of monopolies has become unspeakable?
The big business/big finance campaign of influence has been very long term, pervasive and remorseless, enthusiastically assisted by big private media.
They have used the world bank and the IMF to gut the third world, but the really big prize is the natural public monopolies of the ex social democracies of Europe. Their vehicle; the EU.
‘Their vehicle; the EU.’
I agree , the EU is a manifestation of ‘banks not tanks.’ It is an attack dog for global capitalism in liberals clothing.
I have to say that your comments on the pricing of energy are much needed.
Pricing for energy resembles the pricing mechanisms used in mortgage selling.
Loads of different types of loan purveying advantages that can be marginal to say the least for the home buyer but enabling profits to be made for the bank.
Choice seems to be the most important thing at the moment – even more than the end result which should be affordable energy.
The whole thing is an artificial construct. A nonsense. Its not true competion as the market has few players. It is not a monopoly but is an oligopoly and possibly a cartel.
In truth, along with railways and the water companies, electricity and gas should be run by the state.
They should be nationalised.
The way the energy companies make their profits, is to rely on the very popular uk business model, that is you exploit peoples apathy and loyallty.
The old tend to still be loyal to suppliers (including banks, god help them!) and many of the old and the rest of us tend to be apathetic.
In order to minimise your energy costs you cannot be loyal or apathetic.
Instead you need to be proactive and constantly review and change where necessary tarrifs – a real pain!
But the energy companies know this and so can rely on the apathy of the majority to secure their profits
Sad but true!
Whilst free market gas and electricity does not work, any nationalisation of power companies would mean the price would have to be the same or lower than the cheapest available in each area. If not then those who regularly switch to the cheapest deal will be the first to complain.
It was simpler 30 years ago when there was no paperless billing and online only accounts.
Thats before you start on the fiasco of Smart and Prepayment meters.
As I’ve said before a ‘free market economy’ is not a natural state of affairs. You need government to regulate a market hence why competition law came into being along with the public interest test. Competition does work quite well (not perfectly, nothing can be perfect) when it’s invigorated and supported by government, but it really stagnates and starts to fail society when monopolies or cartels are allowed to take over. It’s even the same in politics..
Interesting article by Joesph Stiglitz
https://www.theguardian.com/business/2016/may/13/-new-era-monopoly-joseph-stiglitz
Networks are monopolies & thus I agree with most commenters that they would be better owned by the state – like UKPN (UK Power Networks is owned by the Chinese state … oh er hang on).
Selling electrons/retail electricity has been made complex (& thus opaque) – for two reasons:
1. it includes a payment for the O&M of the network
2. other charges mostly to do with support for renewables.
Things get more complex when you get to generation. Back in the 1960s – the CEGB was the appropriate org to define what needed to be built in terms of generation which usually meant 2000MW coal fired stations. OK – you nationalise all the generators – CEGB II. Who decides on the generation mix? The balance between nuclear, PV, wind, CHP, biogas, biomass, etc. Who drives demand response? What do do you do about storage?
Example: it is possible using a mix of roof-top PV and battery stroage to deliver 60% of an average households electricity needs over 1 year (= goodbye to 20% of UK elec demand if 100% of households took that route). Where does this development sit in a government owned power network?
Gov control of the networks, found CEGB II with the intention of competing with other generators & giving it a remit to implement energy efficiency, limit the retailers to 10 & make them bid every 5 years for their license with points awarded for things such as customer satisfaction and payment of taxes on profits. Allow & support local electricty producers/supplier (and have them excluded from the 10 limit)
And today we hear from a captain of the industry who says that HMG lacks faith in the free market. Someone should tell him that it’s actually many of the captains who lack faith in the market-that’s why they seek to game and rig it.