When will competition resume?

michaels

WE have now learned (if we hadn't realised before) that suppliers need to hedge /buy forward even for customers who are on the cap rate and possibly customers who are rolling off fixes who won't refix if it costs more than the cap.

What happens if rates then fall and it is possible for other suppliers to take on new customers at fixed rates cheaper than the cap - presumably we see lots of switching to these cheaper tariffs (no one can say now it is only a few quid so not worth the hassle) and the companies who have bought forward the high price cap electricity suddenly have fewer customers to sell it too.

If we now apply game theory rather than classical market theory, with limited market participants there may be 'natural collusion' as it is in the interest of each seller not to launch a cheaper tariff as they will lose customers to the fix and also they know their competitors will be forced to follow suit.

The only option fro competition might be new entrants but these are likely to be curtailed by banks etc being nervous about providing funding.

Perhaps existing consumer companies in other sectors might choose to enter the market (sky, virgin, BT etc) but in the past they have preferred to do this 'virtually' simply by piggybacking on a big provider rather than enter as a new entity and have never been the most price competitive as they simply want to leverage their brand rather than disrupting the market.

mumf

The world ( well some of it) is transitioning to a no/low carbon energy economy.Ostensibly, that is to defeat climate change ,but in reality ,the easy gas and oil fields have been tapped and burnt.It won’t ‘run out’,but what is accessible is harder - therefore expensive- so  we’ve now have to pay the REAL price of energy. Energy costs energy to extract.Energy= money. The ( here on in) expensively acquired energy goes to the highest bidder on the global market. That is the reality. 

   So the way *I* see it, the old model of companies competing in the race-to-the-bottom to supply cheap energy is gone. 

MWT

michaels said:

If we now apply game theory rather than classical market theory, with limited market participants there may be 'natural collusion' as it is in the interest of each seller not to launch a cheaper tariff as they will lose customers to the fix and also they know their competitors will be forced to follow suit.

Watch the market tracker tariffs from Octopus, these do not require new tariff, they are there now and will follow the wholesale market down assuming it does eventually fall.

michaels said:

The only option fro competition might be new entrants but these are likely to be curtailed by banks etc being nervous about providing funding.

Historically the cheap entrants to the market never made use of bank, or any other type of funding beyond customer payments, but hopefully Ofgem has closed that door with the new review policies, but it remains to be seen if they are tough enough.

Thrugelmir

michaels said:

WE have now learned (if we hadn't realised before) that suppliers need to hedge /buy forward even for customers who are on the cap rate and possibly customers who are rolling off fixes who won't refix if it costs more than the cap.

Commodities of all kinds have been traded on forward contracts sale/purchase for decades. It's how guarantee of supply is maintained. Also fixing the cost well into the future. Hedging is a strategy used by airlines in order to guarantee ticket prices months in advance. Relying on spot price alone leaves any business financially exposed to a black swan event. 

michaels

Thrugelmir said:

michaels said:

WE have now learned (if we hadn't realised before) that suppliers need to hedge /buy forward even for customers who are on the cap rate and possibly customers who are rolling off fixes who won't refix if it costs more than the cap.

Commodities of all kinds have been traded on forward contracts sale/purchase for decades. It's how guarantee of supply is maintained. Also fixing the cost well into the future. Hedging is a strategy used by airlines in order to guarantee ticket prices months in advance. Relying on spot price alone leaves any business financially exposed to a black swan event. 

Yes but as a supplier in the past you would probably have expected almost all of your price conscious switchers-in to your fixed tariff to look for another fix at the end of the one they had with you so you probably wouldn't have hedged for the possibility that actually you would be left with them on the capped tariff and that the cap would be well below the market rate to purchase energy.  As you say a black swan and obvious with hindsight but also a not even nearly happened before event so perhaps off the radar fro smaller companies without big trading / risk management departments.