Why is no one asking "Who sets the prices?"

Seajays

I don't know how the wholesale energy market works, and I haven't managed to see any clear description of how it works.  I know "energy" is traded in an open market , but somewhere someone/something must set prices for energy, my question is how does that happen?

We're seeing massive profits for producers of gas/oil, so somewhere they must be benefiting from the hugely inflated prices - so how are they able to set those prices in the first place?  Why has the "market" seemingly failed, in that consumers are having massive price increases, whilst at the same time massive profits are being made?

The media seems to be ignoring this very fundamental question, and seems to be focussed on getting government support to pay the hugely inflated bills (which would appear to be going straight into the overinflated profits!), with an unquestioned assumption that the huge price increases are somehow justified - but I've seen nothing other that simplified "global problems = higher price". 

Can anyone help me understand, or point me to something that goes into a bit more details about all this?

Alter_ego

Demand exceeds supply.

Sanctions against a very big supplier

What_time_is_it

The market has failed for buyers, but is doing very nicely for sellers.
When you have a commodity that is shrinking and that most of the world is addicted to it is a nice little earner without very tight regulation.
Much like the drugs market where a small number of people control the production with relatively little state interference, and secure access to a large market of addicts. And when supplies start to run short, or when there is a crackdown on a major player, prices go up and things tend to get violent.

Seajays

Alter_ego said:

Demand exceeds supply.

So who isn't getting their energy?  Why does that justify ever increasing prices?  Is that not a broken system?  Isn't that the point you need government regulation to prevent that?

You could go "pure market" and say demand exceeds supply so we raise prices as much as we can until we only sell what we've got to those that can afford it.   However end users who require energy to live but haven't got unlimited funds need protecting - it's at that point that you "price cap" - but are we capping the wrong people?  The suppliers have to buy wholesale energy - they're not the ones raking in extra profits... surely the "cap" should be on the original charges, where they are making massive profits out of it?

[Deleted User]

What_time_is_it said:

The market has failed for buyers, but is doing very nicely for sellers.
When you have a commodity that is shrinking and that most of the world is addicted to it is a nice little earner without very tight regulation.
Much like the drugs market where a small number of people control the production with relatively little state interference, and secure access to a large market of addicts. And when supplies start to run short, prices go up and things tend to get violent.

Not sellers - producers. In its last set of accounts, Shell Energy Retail made a loss of £121.5. Octopus Energy made £11.56 per customer account.

The reason why Ofgem is changing the Cap calculation methodology is because suppliers are losing money on Capped customers because the future Cap price was set, in part, by looking in the rear view mirror.

To answer, the OP’s question more directly. Part of our gas supply strategy is LNG from the Middle East on an as required basis. Last Winter, the LNG tankers that we were expecting turned right for China rather than left for Europe - why, because China needed more gas to re-open its economy and it was prepared to buy at above market rate. 

The Government could set a Cap of, say, 5p/kWh for gas. If it did so, the only certainty is that the UK would have no functioning gas suppliers in a matter of weeks.

What_time_is_it

Dolor said:

What_time_is_it said:

The market has failed for buyers, but is doing very nicely for sellers.
When you have a commodity that is shrinking and that most of the world is addicted to it is a nice little earner without very tight regulation.
Much like the drugs market where a small number of people control the production with relatively little state interference, and secure access to a large market of addicts. And when supplies start to run short, prices go up and things tend to get violent.

Not sellers - producers. 

That's a good point actually. And as all drugs barons know, the best way to secure your product is to become a producer yourself - Invest in long term production facilities, ensure the cheapest and most reliable possible methods of producing your supply, and secure the supply chains.

(and, yes, I am prepared to run with this analogy!)

sienew

Seajays said:

We're seeing massive profits for producers of gas/oil, so somewhere they must be benefiting from the hugely inflated prices - so how are they able to set those prices in the first place?  Why has the "market" seemingly failed, in that consumers are having massive price increases, whilst at the same time massive profits are being made?

Energy producers aren't seeing massive profits. Prices have literally gone up 300% but producers of gas an oil make less than 1% profit margin which is fairly standard over the last 20 years. There seems to be an idea among many that if your prices goes up £1,000 that energy companies are making hundreds of pounds on this, or in some cases some seem to believe they are taking the entire rise as profit and that simply isn't the case.

I don't like to defend energy companies, I don't believe they are our friends but there is a lot of misinformation and honestly right now we should be thankful that they can get the energy supplies we need at all (other countries in the EU have a very real risk of blackouts this winter).

Energy companies profits account for literally 0.7% of your bill, it's a boogie man argument. Everyone would be better focusing on things like additional government support (potentially thousands of pounds for the least well off), cutting VAT (a 5% reduction) and green levies (8%). These could have a real impact on bills, company profits at roughly 0.7% of your bill is the last of our concerns.

Edit: just to add, wholesale energy markets are international. The UK govt have almost no power to cap it.

Section62

Seajays said:

Alter_ego said:

Demand exceeds supply.

So who isn't getting their energy?  Why does that justify ever increasing prices?  Is that not a broken system?  Isn't that the point you need government regulation to prevent that?

Everybody (almost) is getting their energy.  Other suppliers are filling the gaps by increasing their output because the increased prices (and some political pressure) are making it worth their while to do so.

If you artificially constrain the price to a low level, those other suppliers won't consider it worthwhile to increase production, and some people won't get their energy.

The issues are international. So governmental action would need to be on a global basis.  The UK government regulating the wholesale price of energy could only impact on domestic (i.e. UK) production.  We can't force other countries to sell energy to us at less than the price they could obtain elsewhere.

And it would be easier to herd cats than to get fully coordinated international governmental action - for some countries it is in their interests for wholesale energy costs to go through the roof, provided demand isn't affected too much.

Section62

sienew said:

Everyone would be better focusing on things like additional government support (potentially thousands of pounds for the least well off), cutting VAT (a 5% reduction) and green levies (8%).

The first focus should be on reducing demand (where possible).

Subsidising people to continue using energy at the same rate risks us joining the list of countries facing a very real risk of blackouts this winter.

Demand reduction is necessary for all sorts of reasons, this 'blip' in wholesale prices could be used to encourage that to happen, in the same way as Covid lockdowns have led to significant changes in the way people work and shop.

sienew

Section62 said:

sienew said:

Everyone would be better focusing on things like additional government support (potentially thousands of pounds for the least well off), cutting VAT (a 5% reduction) and green levies (8%).

The first focus should be on reducing demand (where possible).

Subsidising people to continue using energy at the same rate risks us joining the list of countries facing a very real risk of blackouts this winter.

Demand reduction is necessary for all sorts of reasons, this 'blip' in wholesale prices could be used to encourage that to happen, in the same way as Covid lockdowns have led to significant changes in the way people work and shop.

That is also very true. I was mostly refer to any campaigns for change (such as the demand to tax company profits more or nationalise energy), that effort is best spent elsewhere. On a personal level, reduction in consumption where possible is of course by far the best way to save money.

Xbigman

Section62 said:

sienew said:

Everyone would be better focusing on things like additional government support (potentially thousands of pounds for the least well off), cutting VAT (a 5% reduction) and green levies (8%).

The first focus should be on reducing demand (where possible).

Subsidising people to continue using energy at the same rate risks us joining the list of countries facing a very real risk of blackouts this winter.

Demand reduction is necessary for all sorts of reasons, this 'blip' in wholesale prices could be used to encourage that to happen, in the same way as Covid lockdowns have led to significant changes in the way people work and shop.

Agreed. Unfortunately people don't want to hear that they have to change, cut back or be inconvenienced. Nearly everyone has an excuse to not change. Maybe we need to think about rationing. I don't mean a few black outs, I mean actual rationing where there is a limit to what you can use and then no more. What we'll get is another handout.


Darren