MSE News: Energy prices: analysts predict the year ahead

Mynewt

I didn't for one second susggest prices didn't increase in fact as you can read from my original post I suggested that there have been increases.

The BBC isn't impartial and has been fined for various breaches in the not so distant past. As far as I am able to tell Energy Helpline and Livecharts aren't "media" so whould be exempt from my earlier statement.

Mynewt

Premier wrote: »

No not at all.

But if consumer prices rose by x because of an increase in wholesale prices was y, surely when the wholesale price dropps by y we should rightfully expect consumer prices to drop by x?

Not unless by sustaining the disparity between the two increase causes the supplier to continue "lose" out i.e. outgoings exceeding income.

Remember during the period we're debating the government increased the obligations of the suppliers by quite a fair margin. (smart metering, CERT targets, social tarriffs, renewable fuel mix targets and smart grid)

Premier_2

Well that broadens the arguement somewhat from my earlier simplistic scenario, but lets just say SSE's outgoings don't appear to be exceeding income just yet:

...Scottish and Southern Energy also released its H1 interim results this morning which revealed a 6% increase in the interim dividend, following the period’s increased profit growth which rose to £410 million compared to £302 million in 2008. In the first half, earnings per share also increased considerably to 34.2p from 26.3p in 2008...

http://proactiveinvestors.co.uk/companies/news/10075

...The interim dividend has been boosted by 6.1% to 21p a share and the company has promised 70p (6.5%) for the full year,..

http://proactiveinvestors.co.uk/companies/news/10154

No need for them to pass around the begging cap just yet.

Premier_2

Mynewt wrote: »

I didn't for one second susggest prices didn't increase in fact as you can read from my original post I suggested that there have been increases.

The BBC isn't impartial and has been fined for various breaches in the not so distant past. As far as I am able to tell Energy Helpline and Livecharts aren't "media" so whould be exempt from my earlier statement.

I'm not sure what your point is?

Are you disputing that suppliers informed us last year that gas prices in the UK are linked to wholesale oil prices?

That's all I'm using the BBC link to substantiate. If you wish to dispute this link in prices I am happy to debate it. I am not prepared to debate some unconnected breach of impartiality that the BBC may or may not have been involved in on a forum that is dedicated to gas & electricity.

Mynewt

I'm not doubting that specific piece of information, just generally suggesting avoid using the press or media as a basis for arguement.

There is nothing in your quotations that suggests SSE's profits are linked directly to the prices they are charging. Every supplier has increased efficiencies, reduced overheads to decrease the running costs and this is where the majority of thier profits are created.

As I seem to recall posted here (but I may be wrong on this point, it could be another forumn) it has been noted in media and industry news alike that energy demand is decreasing, and has been for some time. Pricing alone would not be sufficient to negate a downfall in demand.

Another aspect I competely forgot to mention is also an increase in bad debt, as it is in the financial market -- good payers will support the debts from the bad.

I still find it particualry interesting you've still not made a single comment on the remaining portion of original post. Specifically detailing the increases in expenditure suppliers have to deal with, but if your content to deal with only half the issue then so be it! Just remember the other half exsists is all I ask!

Mynewt

I also would think that any business showing growth and profitability in this current economic downturn would be a good thing for the economy as a whole.. or is this just another form of NIMBY (not in my backyard).

Premier_2

Mynewt wrote: »

...There is nothing in your quotations that suggests SSE's profits are linked directly to the prices they are charging. Every supplier has increased efficiencies, reduced overheads to decrease the running costs and this is where the majority of thier profits are created....

At least I've backed up my facts by other sources, so far... hint

Anyway, this time I'll follow your example.

In the very simplest business terms, income-expenditure = profit

It doesn't matter whether the increased profit was made by increasing income or decreasing expenditure, or a mixture of both. At a time when many people are struggling to pay their energy bills, a company that is increasing profits can afford to reduce prices (although admittedly that is not in the shareholders interests as I have posted elsewhere)

Mynewt

IF you read thoroughly my previous post you'll clearly see my repsonse to this, as I deal with energy day-in and day-out I admit I don't keep a record of where every tiny piece of information I collect comes from. It's all working knowledge, that gets used, stored away, used again, and so on.

Your profit example is again rather simplistic and does not take into consideration the extra expenditure that yet lays ahead for energy suppliers with the afore mention obligations. You'll find in most cases the percentage of profit allocated for their shareholder interests is relatively small with the remainder allocated for the increases in spending suppliers have no choice in.

If you look at OFGem's findings (available on their website) you'll see a complete breakdwon of the levels of spending that suppliers are required to make over the next few years. Without making profits now supplier's will be unable to meet these obligations.

And guess what if that happens it won't just be the shareholder's that suffer. It could conceivably lead to suppliers leaving the UK energy market, decreasing competion (thereby increasing prices further), in addition smart metering may not be implemented (highly unlikely due to the target completion dates), smart grid's may not be implemented and the replacement of power stations may not be able to keep up with the demand -- leading to the possibility of power shortage's.

Which would you rather? Energy supplier's make a profit or having no power one day out of seven on a regualr basis? As dramatic as it sounds it's a very real possibility. (you can see preparations have been made for this already by looking at your energy bills, usually on the front page you will see a letter in a small black rectangle. this corresponds with a schedule that has been drafted for a disconnection rota if/when power levels are insufficient for demand)

mech_2

Oops! I clicked thanks by mistake.

Mynewt wrote: »

IF you read thoroughly my previous post you'll clearly see my repsonse to this, as I deal with energy day-in and day-out I admit I don't keep a record of where every tiny piece of information I collect comes from.

It's a bit rich to criticise other peoples' sources then isn't it? What are your sources? Industry periodicals? Are they less biassed than the news media?

It's all working knowledge, that gets used, stored away, used again, and so on.

Working knowledge or misconception? For example the blind assertion that wholesale costs are higher now than they were a year ago simply cannot be supported by any analysis of the figures. I think you'll find a year of gas futures are cheaper now than they were in Nov 2007, let alone Nov 2008... Maybe even cheaper than in Nov 2006!

Your profit example is again rather simplistic and does not take into consideration the extra expenditure that yet lays ahead for energy suppliers with the afore mention obligations. You'll find in most cases the percentage of profit allocated for their shareholder interests is relatively small with the remainder allocated for the increases in spending suppliers have no choice in.

Untrue. The majority of profit after tax goes to shareholders. Have a look at the balance sheet of SSE for example, as I have just done.

Capital investment comes under the heading of "expenditure". Therefore it has already been deducted before reporting a figure for profit. Some profit might be reinvested, but I think it's unlikely they would force up profits purely in order to cover future investment. It's a very inefficient way to raise capital when they're committed to paying 60 to 70% of it to shareholders. It's more likely they'll keep excess profit as a reserve to protect against the possibility of losses the following year. To invest they'll either borrow outright (on the basis that they'll be back in profit on the venture in a couple of years plus still own the assets invested in) or approach investors (rights issue, bond issue etc).

But forget all that. Let's think about how this relates to retail prices for a moment. Most of the investment is needed for electricity supply, yet electricity has risen by a smaller proportion than gas in recent years. I (for one) am paying less for electricity now than I was 2 years ago. Not so for gas! Admittedly this may simply be cross-subsidy in my case, but the inflation figures do indicate greater percentage rises for gas. http://stats.berr.gov.uk/energystats/qep213.xls

If you look at OFGem's findings (available on their website) you'll see a complete breakdwon of the levels of spending that suppliers are required to make over the next few years. Without making profits now supplier's will be unable to meet these obligations.

Typical. You could so easily have provided a link. I can't find this breakdown. I can find a breakdown that suggests that environmental and metering provisions (combined) come to around 5 or 6 percent of retail prices though...

I can also find Ofgem's most recent quarterly price report which assessed back in August that gross margins were about as high as they had been at any other point over the past 7 years.
http://www.ofgem.gov.uk/MARKETS/RETMKTS/ENSUPPRO/Documents1/August%20quarterly%20price%20report.pdf
Costs were expected to come down this winter, based on the prices up to that point. Additionally, the forward wholesale prices curve has continued to fall since then. Therefore margins must be at record levels by now.

[FUD snipped]

Mynewt

I didn't critise the infomation, just that using the media wasn't perhaps the greatest idea in the world - advice more that criticsm, but another man's junk is another man's treasure I suppose.

Wholesale energy costs while decreasing are still higher than year's previous, taking statistics aside for one moment (as i'm sure we agree you can pretty much find a statistic to prove anything nowadays) and use common sense we are now drilling for oil in palces in year's past we turned down as uneconomical or too expensive to exploit, Gas fields are being drained dry and infact some are now used to store carbon dioxide. With shortages of supplies demand will increase and with it prices, in thsi repsect the recession is a good thing has it has curbed demand.

With regards to profits for shareholders that maybe the case for SSE, expenditure is for the accounting year not for what they require 1 year from now, or two years from now. That expenditure sits in profit coffers until such time as it has been used for whatever development.

Borrowing on its own will not be sufficient for example. The company I work for has raised a credit line of approximately 7 billion euros, exenditure in the next 3 years is likely to outstrip this and we're not planning on using this line of credit unless something goes disasterously wrong, simply because using credit costs more money.

With regards to the OFGem link here you go herehappy reading its quite long: h t t p : / / www .ofgem. gov . uk / Pages / MoreInformation.aspx?docid=2&refer=Markets / WhlMkts / Discovery