It's going to be an expensive winter

If you are already worried about your energy bills, then look at this and weep. Forward prices for gas this coming winter are currently 30-40% higher than they were this time last year. Why? Many reasons, but perhaps in 2011-12 the market is expecting our fifth consecutive colder winter in a row?

I think we'd better make this the Chart of the Month for July 2011, a bit ahead of schedule for a change. The source for those who are interested is here, the latest Ofgem market report.

November newsletter - True or False

This month we had a True or False policy quiz.

We asked which of the following has NOT happened since our last newsletter.

• The pope endorsed condom use
• The Prime Minister announced an extra Bank Holiday on my birthday
• The government introduced rising block tariffs, a Lib Dem election promise

The answer of course is the last statement is the false one: Rising block tariffs were promised by Nick Clegg in the election debates, but this eminently sensible policy has yet to see the light of day.

You haven't seen the newsletter yet? If you're on the list, a copy is on its way to your inbox. If not, you can read an online version here or sign up to join the mailing list here.

It's official - we've gone soft

June 2010 Chart of the Month


For over 30 years now, our partners at BRE have been collecting data on average indoor temperatures in the UK. What they've found is that over time we're heating our homes to higher and higher temperatures, from about 13° C in 1970 to over 20° C in recent years. And all this during a period where the weather, if anything, has been slightly warmer than it used to be.


Of course, one thing that has changed since 1970 is that a lot more people have central heating. So what I like about this chart is that it separates out this effect: all else equal, the chart shows that the spread of central heating would have increased indoor temperatures only to about 15° C by 1970 standards. The rest of the increase (by rough calculation about 70% of it) is just behaviour. We've gone soft!

The Energy Saving Trust says that turning down the thermostat down by 1° C cuts your heating bill by 10% on average. So what we're really seeing here is the long run trend of rising incomes and falling relative costs of energy. Which if you're worried about these things, would get you thinking again about pricing.


The data source is here for those that are interested. 

Lib Dems adopt Reverse Pricing

Great news, the Lib Dems have committed to introduce reverse pricing in energy. I believe they are the first major political party to do so, let's hope the other parties follow suit.  Here's what the Lib Dems say:

Protecting low income households is a good idea, but not with a social tariff. It would be better to help low income households consume less energy (e.g. by switching away from electric heating) than to subsidise prices. For more info read our article of 26 March which introduces the reverse pricing idea.

Energy prices double, but suppliers lose money for 5 years. So how on Earth does that work?

A picture is worth a thousand words. Have a look at this, an excellent piece of work from Ofgem:

The chart shows the average net margin on a dual fuel energy account, and goes a long way to explaining the mysterious behaviour of the UK energy market. It's a classic case study in sticky prices: the retailer is 'caught out' by steeply rising prices in the wholesale market, and can't push prices up to consumers quickly enough. Net margins turn negative around August 2004 ... and they don't recover for nearly 5 years.

Horrendous industry, you might think. But the flip side is a 20-fold increase in generation profits. So as long as you are in generation and retail, none of the above matters. What the chart really tells you is that energy retail is just a hedging option for generators, against inevitable periods of low wholesale prices.

So what of the sticky prices thing? One way to think about those is as a barrier to entry for future competitors. As the chart shows, a challenger must be prepared to lose money for a pretty long time. And who's got the cash to do that, if you don't happen to have a generation business in your back pocket? If you saw what happened to BizzEnergy then you know the rest of the story. 

10% of households use 1/3 of our electricity

Last week we posted our Financial Times article on reverse pricing. We said this policy could double the marginal cost of energy without making households worse off overall. There would be winners and losers, and people asked us how many: the answer is about 2/3 of households would benefit, and about 1/3 would pay higher bills.

But here's what's really interesting: to get to this answer we had to crunch the data on 26 million domestic electricity meter points, producing the chart below as a by product. Wow. The top 10% of households use nearly 1/3 of all domestic electricity in the UK. The top 20% use 44%. For whatever reason, there are about 5 million households who consume up to 6 times the national average every year. So we really do need policies - like reverse pricing - that make energy saving more attractive for high volume users.


You can see the source data in DECC's Energy Trends, March 2009 (p24 and after).

Time to Reverse Pricing

So, what to do about the fact that household CO2 continues to increase? We posted a statement of the problem yesterday, so today we post a suggestion on what to do about it. We think the government should require that domestic energy prices increase as you consume more energy, not the opposite as happens at present. Look at the charts: the left hand side shows how electricity tariffs work today, the right hand chart shows how they would work under reverse pricing. The average price is the same for the average user (4-5 MWh / year), but the marginal price would be 2 x higher - halving the payback time of a typical energy saving investment.

You can read more in our article on this in The Financial Times, or click here to download a more detailed explanation of the idea. We would welcome your comments!