ClaretLoup wrote: ↑Mon Sep 20, 2021 4:37 pm
Dale Vince of Ecotricity gave a very concise explanation of the current predicament re electricity prices on BBC R5 and predicted that there would be eventually about 10 suppliers left. He also explained that the hedging situation would decimate the small suppliers. He did also envisage a scenario were the existing suppliers might not be able to absorb up those customers left without a supplier. When pressed for an answer as to what would happen, he could not give one as the current situation of a price cap, rapidly escalating costs and large numbers of suppliers going bust was unprecedented. He also said that the wind had dropped over the summer affecting renewable supplies and that UK was extremely vulnerable to gas price fluctuation as our storage capacity is now only capable of storing 1% of demand.
So all things considered it is going to be a bumpy ride particularly if there is a cold winter.
He also expressed the view that the country would be far better off if energy generation and distribution were re-nationalised. I seem to remember in the old days you had one supplier so you didn’t have to waste hours shopping around and energy was priced at the cost required to generate it plus some extra for investment for new supply facilities. Additionally we did not have to rely on the Chinese and French for the finance and expertise to build and finance power stations by giving them an extremely generous guaranteed price.
I wonder what your view is on Dale Vince’s suggestion?
Hi ClaretLoup,
As I posted above, I'm now retired. Approx 15 years of my career included experience in UK gas and elec markets.
I've met Dale Vince and did business with Ecotricity, his company - well before he invested in Forest Green.
He's right that small companies that aren't hedged will be "decimated" - though as "decimated" means 1 in 10 wiped out, he's wrong: it will be closer to 100%. But, these small, undercapitalised energy supply companies should never have been granted a license - only companies that had the resources, plus the skills and experience to run a successful combined
price risk and
volume risk hedging programme should be licensed. It's always been a "tough gig" to manage the volume risk - hedges are sold as fixed volumes, but energy suppliers sell to their customers with the right to consume all the gas and power they want/need. Logically a company would hedge for average or expected customer demand and, of course, a large part of demand is driven by the weather: colder than average we burn more gas and power, warmer than average and we burn less. A supplier that is out of balance with their hedges will lose on the volume risk. A supplier who has no hedges will lose heavily on price risk.
Most of the small suppliers were tempted into the market because they don't pay many of the "green levies" - so they had an inbuilt lower cost advantage - and, I don't think they pay any of the costs of guaranteeing customers who are in credit when their supplier goes bust. This is all part of the "political distortion" that the market needed more suppliers and that small suppliers would solve the problem of "lack of competitiveness." By my count, at least 30 small supply companies have already failed in the past 3-4 years. The rest have only been "winging it" until something a little bit bigger also took them out. Global gas prices, which are swinging because of covid-19 impacts, globally, looks like it will do it.
Maintenance is regularly carried out in summer, because demand is lower - we don't need to heat our homes and the days are longer. But, things can and often have impacted on maintenance programmes. Sometimes maintenance takes longer than planned or it was simply planned to take longer because it was expected that the wind (and solar) would meet most of power needs. But, the weather patterns resulted in the wind turbines not turning...
Little things, such as the France-Angleterre Interconnector fire happen from time to time. They don't usually matter. But, they do matter when other things are also already out of operation.
Centrica Gas Storage announced close down of Rough Gas Storage in 2017. This was the UK's only major gas storage facility, based on a depleted (southern) north sea gas field. I think the close down programme was supposed to run to this summer - though it may have closed earlier. Given the drive to de-carbonize the economy I doubt any serious consideration was given to investing in a new natgas storage facility. I'm sure the expected life would have been too short to make any economic sense. Depleted gas fields in north sea are more likely candidates for (i) carbon capture and storage and (ii) hydrogen storage. Both of these activities are in the future, rather than near term.
The whole "climate change" programme has had an impact in the UK gas and power markets since early 2000s. It will continue to have a growing impact in the years ahead. We should all expect the price we pay for heat (and cooling) and light to rise. These are the long term trends.
We should also expect that not everything will "go right" in the pursuit of a net-zero economy. Some programmes will fail, there will be wasted investments, many companies will go bust, many politicians will make the wrong decisions - and the electorate will often be "steadfast" in backing the ones that are making the biggest wrong decisions. (Wasn't it ever thus)?
Should the UK re-nationalise? I can't see that making things better. Governments are always great at making the worst choices. The old CEGB, National Grid, Regional Electricity Boards and British Gas monopolies were inefficient. The UK consumers and industries paid more than they needed to. If there's no profit motive then resources are wasted, new and better ways of doing things develop slowly, if at all. Customer prices will almost invariably be higher than they should be, in part because no one is incentivised to control costs and no one is rewarded for "selling" to customers, because the customers have either to buy from you at the price you decide - or find a substitute product or "do nothing" i.e. don't operate, close down or don't start-up.
UK power generation now includes wind, solar, biomass, hydro, energy from waste in addition to coal (to close in a couple of years), nuclear (but needing new plants as all the old ones retire) and natural gas (most being constructed by private owners). I doubt a state monopoly would have provided this broad range of generation capacity. I doubt a state monopoly would have provided any encouragement for Dale Vince, or similar, to develop a renewable energy generation and supply business.
Nuclear generation? I can't think of any private institutions that would invest in/back nuclear generation. The downsides are too heavily weighted against achieving the required return: Fukushima, Chernobyl, Three Mile Island.... then there are the cost overruns on the EdF plant in Finland. But, nuclear is "zero carbon" when generating (though not zero-carbon in construction) and nuclear is reliable and predictable (when operated as designed) compared with wind and solar which is governed by uncontrollable weather patterns. France chose to focus on nuclear power generation when OPEC started controlling oil supplies - France didn't have the same coal reserves that the UK had and didn't have the oil and gas opportunities that the UK had in the north sea. So, France has majored in nuclear generation - I'm inclined to guess at a factor of 10 larger than the UK's nuclear generation fleet (without looking at google or elsewhere). China has developed it's nuclear generation capabilities as part of the state's political ambitions. It's way "beyond my pay grade" to know whether it's a "good idea" or a "strategic mistake" to depend on China for UK nuclear generators. Maybe there's a hint in AUKUS...
Of course, the state - in all countries and not just the UK - is heavily involved in the energy supply business. It's good that the state "sets the rules." We need to be clear that "carbon emissions" need to be cut and that means changing the way energy is transformed from the primary sources into consumable forms. As we know, in the coal and oil eras we weren't aware of the harms done by these transformations - in the earlier years, the benefits were greater - and, then we were probably slow to realise that balance was changing.
Let's summarise with a few bullets:
1) Energy markets too difficult for small companies - they should not have been licensed in the first place;
2) Wind turbines don't respond to consumer demand, so need back-up generation, but that is expensive, or need to be able to store when surplus (that is also expensive);
3) maintenance, always in summer when demand is low, but sometimes the demand isn't low in summer or other events disrupt the market;
4) nuclear, both good - zero-carbon and bad - risk rewards too far outside investors tolerance, so state supported only;
5) the state running monopolies is the worst of all choices, it will kill off all the innovation that is required to stand a chance to address climate change;
6) climate change requires (massive) transformation and disruption to existing industries and existing consumption patterns - the way we live now has to change - expect to have to pay the prices for these changes.
Too long, I know. But, as I said, I'm retired.
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