I have just posted this thread to Twitter:
Making sense of energy price rises is important. They're going to be the cause of a lot of poverty in the UK. So, I've been doing some analysis. What follows is a bit simplified, but not too much. What it reveals is that you're about to be ripped off, massively. A thread….
In January 2020 SSE suggested that the cost of the energy they supplied was broken down as follows:
Let's take that SSE data as a reliable benchmark for what's happened to date. And let's assume that all the data that I can find that says that the average house paid £1,200 a year for fuel in 2021 is also right. It was pretty much for me, for example.
Now let's base what energy costs might be on the fixed prices now being made available by the same energy suppliers who were happy to supply our electricity and gas for £1,200 last year. It seems around £3,000 is that new normal. Again, it happens to be for me.
So, the price is increasing by £1,800. But the cost of some things has not changed. For example, the costs of delivery, billing and customer services have not changed, certainly by much. Nor should government and environmental schemes cost more.
To be clear, delivery cost £288 on average in 2021, and I am assuming it still does. Billing and customer service cost £240, and still should. And green and other levies cost £156, and I see no reason why they should change. That's £684 of cost that should not change, at all.
The government is still taking 5% in VAT. That was (and this is near enough) £60. Now it's £150. Why you need to be penalised with £90 of extra tax for energy costs going up is for the government to justify. It's a decision they seem happy with. Take it up with them.
So, of the new £3,000 cost we've explained £684 of fixed costs and £150 is VAT. That leaves £2,266 to cover the cost of buying in the energy sold to you and profit.
In 2021 the cost of bought-in energy was 36%. That was £432. I've checked the accounts of UK based energy company. I used SSE again, because that seemed fair. They made a normal profit margin of 11.6% in 2020 and 13.3% in 2021, or about 12% on average.
SSE both makes and distributes energy. Now, this is a little simplistic, but let's assume they make 2% on distributing energy to us and so made 10% on making energy. The profit on energy distribution was £24. That on the bought-in energy was, then, roughly £43.
So now we can work out that the cost of producing the energy that was sold to you in the last year was the bought-in cost to the distribution company of £432 less £43 (near enough) of profit the producer made, or about £389 of real cost of production for the year.
Now let's assume the profit margin on distributing energy remains at 2%. With the average cost of domestic energy increasing from £1,200 to £3,000 that puts the distribution profit per customer up to £60. That's two and a half times what it was before. That's a big jump.
And let's be clear, that none of the cost of producing energy in the world has changed because of war in Ukraine. In fact, right now, there is not even a shortage of energy in the world because of that war: Russia is still supplying oil and gas right now.
So, the only reason for price increases is because oil and gas dealers expect a shortage in oil and gas which has not happened as yet. Bluntly, what we're seeing is panic buying of oil and gas that's still in the ground right now by countries terrified that they might run out.
It's vital to remember this: oil and gas are going up in price because people – oil companies, hedge funds and others - are speculating in oil and gas in the expectation that there will be shortages. No one actually thinks the stuff is going to cost more to produce.
So, let's summarise where we are in this table:
Please accept that some of these numbers will be give and take a bit, but probably not that much. I think my assumptions are pretty fair.
Then notice that the first three lines in this table have not changed. These costs are near enough fixed. Meanwhile, the government is going to take £90 a year more off you whilst the distribution company is going to make £36 extra profit a year out of you.
And then note that the electricity and gas suppliers to the distribution companies are going to see their profits increase almost exactly forty times, from £43 a year to an extraordinary £1,717 a year.
That's where your extra payment is going. It does not disappear into a black hole. It goes to oil and gas companies, power generators, the countries and shareholders that own these, and of course to the speculators who are currently making billions out of this.
To put this in context, it's estimated that the price of UK energy is going to increase by £38 billion. That increase will be split between the government (£1.9 billion), the energy distribution companies (£760 million) and oil, and generation companies (£35.34 billion).
In plain straightforward terms that is profiteering – or exploitation if you like – on a quite staggering scale. Brexit is the excuse for some. Covid was the excuse for more. And now the war in Ukraine is being used as an excuse for the biggest rip off of all time.
Four questions then. Why is our government accepting this? Why are governments elsewhere accepting this? Why aren't they cooperating to stop it, individually or together? They could. They aren't. So, what is going on here?
I look forward to answers from ministers and justifications from oil companies. And in case I have anything wrong, I look for clarifications. But the explanation I seek is why is war being permitted as an excuse for a massive rip-off of ordinary people by big oil companies?
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“Why are governments elsewhere accepting this?”
They are not, well.. the French ain’t (& they hold the EU presidency). My sources tell me that restructuring of markets will be rammed down the throats of the recalcitrant i.e. the Germans, following Merkel-exit the German have become more amenable to change – as opposed to Frau Doch Doch.
Euractiv profiled French output (gosh for once a politico talking sense – well I never):
https://www.euractiv.com/section/energy-environment/news/france-leads-the-way-in-reforming-absurd-energy-market/
Comment from regulators in the article suggest that either they have been drinking too much or are just mad. For those in need of light entertainment, I have BTLed. & with respect to ACER – they have a long paper from me & my fellow Commission conspirators on market reform (which will be ignored – but I’ll send it to the French perm ref who doubtless will be happy to have it). This can’t go on – we are getting to pitchfork territory – real soon.
Richard
The government of France has capped EDF price increase at 4% to French customers. Something to do with it being state owned perhaps? 🙂
It might be of interest to include the following into your analysis:
Annually, Energy companies have a duty to disclose the fuel mixture that goes into their supplied electricity. Clearly, that means separating out the Gas and Electricity in a dual fuel bill. However it gives a more granular narrative of the actual profit. For SSE this document gives the details:
https://sse.co.uk/v3/assets/blt09078e271abddd45/blt04622618eb198f78/5f6e06c9981e5e4546772fb0/energy_fuel-mix.pdf
In short, the fuel mix is as follows:
Sourced fuel SSE UK Average
Coal 0.0% 3.9%
Natural Gas 48.1% 39.4%
Nuclear 0.0% 16.6%
Renewable 51.9% 37.9%
Other 0.0% 2.2%
Total 100.0% 100.0%
Which means the existing ‘cost of fuel for generation’ that is affected by international energy trading is 48.1% for SSE. So the profiteering is a bit more than you suggest.
I was going on the side of caution
And was heading for bottom line and not gross margins
In the Uk & other markets, SSE, EdF and other companies that have both retail and generation operations, are obliged by law to erect chinese walls between these two operations. We can speculate as to how effective this is. However, the retail operation has to buy in @ wholesale – regardless of what this is. In a normal market – the wholesale cost is then pased on to UK serfs. The UK is not normal – since it operates a price cap. Which begs the question: why bother with real-time metering (which is another story for another day).
On the wholesale side of the fence, the market operates on the basis of marginal pricing: with a mix of forward sellling, day-ahead and spot. The day-ahead is a good guide to reality & is fixed by the cost of the most expensive generation – in this case gas – in this case OCGTs. (open cycle gas turbines). By all means accuse the companies of profiteering – they have long been due a proper kicking. But this is to divert attention from the real culprits: BEIS & politicians. They have known about the problems caused by marginal pricing for some time & have chosen to do nothing.
The current problems with high priced elec are partly due to high gas prices, but the main blame is the politicos for a) not reforming wholesale markets b) not getting serious about renewables. Concluding, the current crop of imbeciles have been in power for 12 years – with almost unquestioning support of the UK’s mass meeja who are also culpable for the current mess -and let’s not forget – the media scum and the politico scum are all cut from the same cloth – by and large they have similar backgrounds & thus shared attitudes.
I added this point this morning in additional material
I blame neoliberalism
You are right to do so
As my wife noted after reading the thread before it was posted, the answer to my questions is that neoliberalism is a killing machine and we need politicians now willing to stand up to it.
I know it’s easy to blame the oil producing companies.
the real reason why oil companies are making money now is because they are not investing in producing more oil due to the low price for the last 8 years. 30% or more of the work force has transitioned/were fired. Their supply chains have been damaged/shrunk and the industry is no longer able to return to how it was 8 years ago. In fact, the likes of BP & shell are investing more in renewables these days.
take a look at tullow oil fy2021 results and you’ll see where the real profit is going. Due to the funding shortage for the oil and gas industry, companies like tullow oil are forced to sign up for high yield debt and then forced to hedge their oil and gas production at low 50/60s/bbl. So who are the ones holding all these oil contracts?
Hedge funds
Correct.
The global bond market is about USD 100trn in size, Hedge Fund assets are about USD 4 trn. So, although Hedge Funds can and do “move the market” in the Fixed Income world the market is big enough to take it.
By contrast, total global oil (and oil product) storage is about 10bn barrels or USD 1 trn…. so hedge funds can really exaggerate moves.
(Actually, it a lot more complicated and interesting……. but the data I have given does illustrate the point).
Simple data is quite often sufficient
Doesn’t SSE have a Fair Tax Mark?
Is it going to be taken away because of this?
I am no longer involved in the Fair Tax Mark and do not advise it
With the exception of France then, (and how long will Macron tolerate that I wonder?) it seems that this is Snyder’s observation about Neo-liberal ‘TINA’ thinking leading to what he called ‘inevitability politics’ – the idea that there are no ideas (p.15 ‘The Road to Unfreedom’, 2018).
Markets have become a replacement for policy, inequality and poverty begin to rise, social mobility wanes and people’s progressive expectations are lowered and then ‘eternity politics’ arises where the frustrations are channelled by oligarch- fascist behaving Governments into substitute causes – look how there is already an effort to target carbon-reduction as the ‘problem’ now.
You’ve got to take your hat off to Tim Snyder: he knew what was coming. And the rest.
The carbon lobbyists – who I bet outnumber the politicians – are no doubt hectoring and bullying said politicians 24/7.
It’s actually a democratic crisis isn’t it? Who rules? Who is in charge? Where are the ethics?
In the words of Lou Reed ‘ This here’s a zoo and the keeper ain’t you and I’m sick of it, I’m so sick of you’.
We need better people with our interests at heart than the current shower we have in at the moment that is for sure – the world over it seems.
Worth pointing out that nobody has built a new oil refinery for many years, the simple reason being the nobody wants to invest in plant where the feedstock will be running out soon.
Cartel capitalism at it’s worst.
The analyis is compelling.
2 general points to make:
1. I believe that the massive standing charge increases include a first installment towards recovering the cost of failed energy companies and existing companies picking up their customers. We have along way to go on this and these account for £200-250 in the price cap from April. Around 10-15% of the average household bill from April will be the standing charge – the price for market failure encouraged by Ofgem’s negligence. This will increase in future caps if matters remain unaddressed.
2. The analysis underpins the logic for a windfall tax. If as your analysis shows producer profits will soar to over £30bn p.a. – all from consumer pockets – the the government has a duty to use its tax raising powers to effect a more equitable redistribution to counterbalance the failure of the market.
Re (1) – true
But wholly unnecessary and unjust
Another unfair policy decision – not a cost