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John Kemp: Britain Needs Energy Glasnost

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John Kemp, Reuters

What Britain’s energy market needs first is more glasnost (openness). Before the market can be sensibly reformed its cost structure and profitability need to be properly understood.

Britain’s gas and electricity retailers will have to be much more transparent about how they buy wholesale supplies on behalf of their customers if they are to defuse the political storm that has erupted over energy bills and restore trust among bill-payers.

In a thoughtful editorial published on Monday, the Financial Times, which has fiercely criticised demands by the opposition Labour Party for a temporary price freeze, made a strong call for perestroika (reconstruction) in the energy market (“Reform trading rules and re-evaluate green subsidies” Oct 27).

But what the energy markets needs first is more glasnost (openness). Before the market can be sensibly reformed its cost structure and profitability need to be properly understood.

WHOLESALE COSTS

Remarkably no one seems to know how much the country’s six dominant energy retailers are paying for the power and gas they buy on behalf of customers, and whether they are securing a good deal.

In the debate over whether wholesale energy costs, environmental obligations, or profiteering are pushing bills to record levels, even the regulator, Ofgem, and industry experts are unable to state what price the retailers are paying for the power and gas they buy on wholesale markets, and whether it is reasonable.

Ofgem claims rising wholesale costs account for only a tiny fraction of the recent round of increases, based on a model about how the retailers lock in supplies and prices in the forward market. The companies dispute the regulator’s calculations. “The Ofgem methodology is at best an approximation,” according to Centrica.

Ofgem and the six major energy retailers agree the profit margin on their supply business is around 5 percent, and that this is defensible, though it is higher than many supermarkets achieve.

But the retailers are all power or gas producers, and buy much of the electricity and gas that they supply from their own production and trading arms, or from one other, via bilateral deals.

No one seems to know the details of those deals, whether they are reasonable, and what profit margins the major energy retailers are making in their connected generation and production businesses.

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