Renew On Line (UK) 30

Extracts from the March-April 2001 edition of Renew
These extracts only represent about 25% of it

Electric exploitation

According to OFGEM, the UK energy regulator, consumers have been systematically overcharged since privatisation, and prices have been ‘higher than they should be’. That was the theme of a ‘File on Four’ programme on BBC Radio 4 on October 31st.

Prices have fallen of course, but only around 10%. Steve Thomas from the Science Policy Research Unit at Sussex University argued that, given the 30% reduction in coal prices and 40% or so cuts in gas prices since privatisation, the prices charged to consumers should be 25% less than they are. He claimed that in fact little if any of the savings from reduced generation costs had been passed on to consumers. Instead they had gone to shareholders, with, the programme claiming, company profits, for generators such as Power Gen and National Power, typically increasing by 4 or 5 times. OFGEM talked of a £1.5bn mark up, a figure also quoted, for the last four years of trading, in a study by the Department of Applied Economics at Cambridge University. ‘File on Four’ suggested that this was a conservative estimate- the full consumer overcharge might be more like £4bn so far. So consumers were probably paying more than they would have paid if the industry had not been privatised.

OFGEM suggested that this overcharging was possible because of the structure of the post privatisation industry and market. The half hourly spot price market allowed the main generators to manipulate the pool prices to their advantage. Obscurely, the market operates by paying the highest price bid in the half hourly power contract competition to all generators. So there was the possibility that one company would volunteer to bid high and raise the overall prices, for all to benefit. They might then take turns to carrying this lead. More usually though, high prices were commanded by companies withdrawing power from cheaper plants at key points, for maintenance or whatever. Clever manipulation of supplies against demand could thus ensure excess profits. Indeed, it was claimed in the programme that the industry had managed to recoup the £500m windfall tax imposed by the government in this way.

Certainly ‘File on Four’ gave some startling examples of pool price variations- which could increase by 10 times at some parts of the day due to demand surges when only expensive supplies were available. A steel works reported that the prices it faced varied between 2p and 12p/kWh and at one point had shot up to 28p, resulting in the plant shutting down for duration of the high prices. To avoid these sorts of swings, a fixed price contract had in fact been arranged, but the retail electricity supplier, Yorkshire Electricity, had found that it was losing money keeping to it, and had made a deal with the steel works, to stay shut down for the high price periods, and share in the money saved.

David Porter from the Association for Electricity Producers countered that price windfalls could be balanced by losses- you had to look at the year as a whole. But even so, the craziness of this system was why the new Labour Government set about revamping the power market- via NETA, the New Electricity Trading Arrangements. This will replace the half-hourly pool competition with a four hourly competition with ‘power balancing’ arrangement involving severe penalties for supplies unable to provide the contracted amounts of power. That of course will make life harder for small intermittent renewable generators- but it should limit the potential for undue price manipulation .

However, although now on the statute books via the Utility Act, the NETA arrangements are still not in place- there have been problems with the computer system which have resulted in a postponement first until January and then until March. And that’s not a solid date. ‘File on Four’ noted that consumers were therefore still being surcharged by about £4m per day under the existing system….

California has had similar problems, following their market liberalisation- the regulatory authorities have recently had to step in to stop consumer prices swinging wildly, and to try to avoid blackouts

Consumers Council accepts higher prices

Consumers may often resist price rises. However, not all price rises are resisted- it depends on what they are for. Commenting on the impact of the proposed Renewables Obligation on electricity prices, the National Electricity Consumers Council has noted ‘current proposals for the Renewables Obligation will cause a price rise of about 3.7% by Oct 2000’, this being the result of the proposed 3p buy out price. However it went on that ‘while we are concerned about increasing prices, environmental targets need to be met and the interests of future as well as present consumers of electricity safeguarded.’

It added ‘The Renewables Obligation will go some way in achieving these aims. In the long run, consumers will gain from lower prices as the cost of producing renewable energy will reduce with improved technology. The price of diminishing reserves of gas will increase. To increase transparency, the government and regulator should ensure that the impact of the Obligation on electricity prices is stated on customers bills. We do not believe that the proposed buy out price cap on the costs of renewables should be increased, except in relation to RPI.’

The NECC is on 020 7828 7790.