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The Energy Companies Wear No Clothes

I have written these citizenship journalism articles as I have become increasingly interested in the hard details of what is driving fuel poverty as I and others encounter it. My experience with energy suppliers have been negative as a consumer which brings me to expect that the ‘customer’ is always wrong at every turn.

Energy companies yearly report increasing profits as my bills go up and up, and the service gets poorer and poorer. Similarly, the companies seem to be avoiding sufficient investment in sustainable infrastructure or technologies that will enable a society which does not squander intergenerational equity – i.e. the natural resources which belong to future generations.

monopoly

This is my investigation into the way the major energy companies and their impact in my life and general society.  This is by no means, a query which is isolated to my curiosity. The commercial forces which are at work are having a widespread unpalatable effect in our world culture. The Energy and Climate Change Select Committee has criticised the ‘big six’ energy companies; specifically British Gas, Eon, EDF, Npower, Scottish Power, SSE.  Some of their findings include the concern that these suppliers:

  1. Make it very hard to understand how they make their money
  2. Make it hard for customers to understand what they are paying for
  3. The fact that the Regulator Ofgem has not been doing enough to police them

 

The retail energy market in the UK is dominated by a small number of firms; more than 95% of households use of one of the big six firms. Utilities are known as natural monopolies. A natural monopoly is a distinct type of monopoly that may arise when there are high fixed costs of distribution, such as when large-scale infrastructure is required to ensure supply.

ofgem logo

Examples of infrastructure costs include cables and grids for electricity supply, pipelines for gas and water supply, as well as networks for rail and underground. These costs are also deter entry and exit, to and from the market place. Natural monopolies are common in marketplaces for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities.

Because there is the potential to exploit monopoly power, governments tend to nationalise or heavily regulate them.

A moral hazard occurs when individuals or organisations are insured against the negative consequences of their own inefficient behaviour – and we now seem to be in a situation where we are weighing up the lesser of moral hazards. Where a government is built upon social responsibility, a corporate company is hard wired to look out only for it’s own interests – specifically, the fiduciary responsibility of the Cheif Executive Officer to gain more profit for the share holders.

schneider-electric

David Hunter; analyst for the Energy consultancy firm Schneider Electric was asked “Is there a lack of transparency in how the energy firms are making their money ?”.  He answered “There is not full transparency in terms of how they are making their profits, particularly between the generating wholesale and trading arms and the retail division.  The rhetoric which is broadcast out says electricity prices are going down – a major question is why is that reduction in cost not filtering through to customers bills ?

Responses are that they ‘bought the electricity last year, where we buy some of it at advance and some at spot level’

This is the futures and derivatives market of commodities in the stockmarket influencing the industry in adverse ways.  Joseph Stiglitz, Nobel Prize winning economist, tracks the rise of the commodities index from it’s beginnings in 1991, through the 1990’s when investment banks lobbied for the degregulation of this market, to 1999 when this lobby was successful in lifting the ceiling on the amount of holdings which they can take on.

Monopoly Man

He indicates that the deregulation of the commodities index – on which energy futures are traded – created the destabilisation of the market and introduced artificial inflation of prices (not just of energy but of things such as staple foods). Fuel poverty ensues in the same fashion that food poverty ensues (Amartya Sen, another Nobel Prize winning economist’s work suggests this injustice involves monopoly, price fixing and regulatory capture).

The energy companies also hold international assets, where a number of them have operations abroad. This does not mean that we should not be able to operationally seperate the different parts of the businesses, and they still know what profits they are making in these markets, whether they are moving up or down on the index; also they know the details of how they are selling onto customers.

Transparency is being called for to help gain trust in these companies and delineate the profits which they are making at different parts of the supply chain.

 

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