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).

Can we make CO2 into fuel?

Here's some interesting science. It may be possible to turn CO2 into methanol, a useful fuel. There is a good article about this in the New Scientist and you can find a summary of the science here.

Nobody believes the strategy will work

We do like the new government strategy for household energy management, we just don't think it's going to make much difference. But who cares about us, what does everyone else think?

Here's one way to find out. Today's chart shows the Centrica (i.e. British Gas) stock price since Ed Milliband launched the Warm Homes strategy on 2 March. According to the Minister, we are going to cut household energy demand - about 1/3 of Centrica Group profits - by 29% in 10 years. What did the market make of that? Hmmm. Centrica stock is up 4%.

(OK, so I admit, this one is just for fun. We could have looked at SSE, whose stock price has gone the other way in the same period. But the point is that the new strategy doesn't seem to have made a jot of difference to utility stocks. I'm pretty sure this wouldn't be the case, if analysts really believed that household energy demand was going to be down 30% within 10 years. Or if they expected the government to introduce a policy with a more dramatic impact, such as reverse pricing.)