Martin should campaign to fix the broken electricity pricing model

tpeppers

MattMattMattUK said:

tpeppers said:

I doubt my suggestion will be popular with everyone, especially on this forum, but I might suggest a new fairer pricing model going forward.

At the moment, the system is largely based on luck - i.e. whether you were able to renew your fix at the right time, whether your energy supplier went bust and you ended up on SVT, whether you followed MSE's advice and didn't fix when you could have done, whether you took a gamble with a fix and it paid off etc etc. This ends up with the situation we have now where some people paying far too little for their fuel, meaning energy suppliers have to charge everyone else a lot more to make up for it. It's an unfair, unbalanced system - essentially akin to gambling - that is hitting the uninformed and unlucky the hardest.

I would suggest a new universal pricing system, at least temporarily until prices stabilise. All fixes would be removed, and the price per unit of electric and gas would be determined solely by the government. It would be similar to the price cap, except it would be less expensive as energy suppliers would no longer be losing money to those on cheap fixes. 

Whether the government would have the legal firepower to instigate that, though, is another question.

The current system is peculiar, unfair and confusing, and needs to be drastically overhauled. Something so basic like affording the fuel to heat and eat shouldn't be left to a gamble. 

Energy providers are not losing money on those cheap fixes, they used the guaranteed revenue from those fixes to hedge a certain amount of future supply. They will still be making money on those fixes due to the nature of hedging. 

Thanks, I realise my mistake now. However I would still argue for a universal pricing model.

[Deleted User]

wittynamegoeshere said:

ProDave said:

I was discussing this on another forum.

We know the price of gas it thtough the roof because of the Ukraine war.  but the cost of all other methods of generating electricity has not gone up, only that percentage generated by gas.

If it were a true open market, all the renewable, nuclear etc generated electricity would still sell at the same price and only the gas produced electricity would cost more, and energy companies would buy as little of that as possible and the electricity bills would rise a lot less.

THE MARKET IS BROKEN.

The "market" is functioning as a "market" classically should according to the textbooks.  Prices are set at the margins, there's a shortage due to the disappearance of one massive supplier so the value of every supplier's product rises.  The cost of production is irrelevant, it's value is between buyers and sellers.

What I'd like to see discussed among those in power is whether a "market" is in fact the right mechanism.  Perhaps there's a need for some kind of emergency price control, just allow generating companies to charge a price according to last year's price plus a fudge factor.  We are in a state of national crisis, we shouldn't really let daft debates about left vs right, communism vs capitalism get in the way of doing what's right for the nation as a whole.

But, I suspect that many politicians have already done the right thing (for them) by investing their money in energy company shares long ago at the outset of hostilities, just as it's on the record that a number of US politicians did.  So those in power may have interests other than the welfare of the people who elected them.

The Government could of course cap energy prices but the unanswered question is ‘who will pay for it’?  The Government cannot legally demand that suppliers subsidise consumers. Yes, supplier compensation could come out of taxation with the rich being asked to pay more, or through more borrowing. Ask the Greeks about National Debt; stagflation; job losses(23.7% unemployment at one point)  etc. It was only just coming out of the 2008 crisis when Covid hit; followed by the present energy crisis.

Also, bear in mind, that 1% of our population pays 25% of the tax income that the Government receives. They run businesses etc. P**s them off, and the Government will end up with a lower tax take. If that happens, who pays for the NHS; Defence; schools and welfare benefits if the big earners decide to live abroad?

Yes, politicians are in total denial about this at the moment but the iceberg is getting ever closer.

Section62

tpeppers said:

MattMattMattUK said:

Energy providers are not losing money on those cheap fixes, they used the guaranteed revenue from those fixes to hedge a certain amount of future supply. They will still be making money on those fixes due to the nature of hedging. 

Thanks, I realise my mistake now. However I would still argue for a universal pricing model.

As the people on fixes aren't being subsidised by those on SVT then why shouldn't people have the option to fix if they can find a deal which suits them?

For some people having certainty about the amount they pay is more important than the actual amount, they are willing to pay more for that certainty, if necessary.

(Disclosure:  I'm on SVT and the (un)certainty referred to above doesn't bother me either way)

Chrysalis

Section62 said:

Chrysalis said:

My thoughts on this are quite simple.  We shouldnt need to encourage private investors to invest in a supply of energy, instead we just invest ourselves as a state, so yes bring energy extraction to state ownership.  There would be a mandate where only excess energy that isnt needed by the UK can be sold off (exported).  Energy supplied for UK needs would be isolated from the open market and not affected by market costs.

I am not sure the private market is fixable, points have been made by others on here, we could remove this very strange pricing model, but the market would likely still end up with inflated prices with the trading that goes on.

An insular approach is Ok if people are willing to pay the additional costs associated with it.

Trading energy works to our advantage in that we can work with lower supply margins and can have a greater proportion of unreliable renewables in the system.  If there is plant outage, or (say) wind is only producing a marginal amount, then we can buy in the additional capacity from our neighbours.  We return the favour by selling energy to them when they are in need.

If we aren't willing to trade then we need the confidence that our own insular system has all the capacity required to prevent black/brownouts.

The CEGB spent billions on providing and operating standby and reserve generation capacity, at a time when relatively reliable and predictable coal generation was meeting much of our needs.

If we want to go it alone then we need to invest in the additional generation/storage capacity necessary to do that, and I'm not sure people want their bills to go up to pay for all of that.  Added to which, by the time the 'stuff' has been designed and built (say 10 years), the economics will almost certainly have changed significantly again.

Think about what you saying and think again.

The reason to do this is to reduce bills so "the not sure people will want their bills to go up to pay for it" isnt what will happen.

We would have a much lower base cost as profits would be removed, there would be cost on top of that to fund the investment and running costs but the price to consumers would be considerably lower as most of the current costs are added on by the open market.

Its like saying people prefer paying £1 for an apple instead of 40p because they might not like paying some of that 40p on investment costs.

The only long term solution is bringing energy extraction to state ownership or at the very least state control, anything else is kicking the can down the road.  You could increase private capacity by 10x but it would still be at open market international prices.

I of course do agree we have to make sure we have enough capacity, so invest properly not on the cheap.  But this will still be far far cheaper.  As I said think about it, we face with having to subsidise energy costs to the tune of 30+ billion a year at this point, that is a colossal amount of money, 300 billion over a decade (and thats if inflation stops which it wont), building reactors is expensive but not that expensive.

Chrysalis

pochase said:

Chrysalis said:

doodling said:

Hi,

ab1234567890abcdefgh said:

FreeBear said:

glynbristol said: That is why the cost of electricity (from all sources)  quadruples when the price of gas quadruples, even though the mix of gas in electricity generation may only be 15%.

You need to research your statistics a bit better.

https://www.energydashboard.co.uk/live shows that as of *now, 45% of electricity is being produced by gas - Other sites are showing slightly different figures.

They were giving an example.  It's fairly clear from the way they worded it.

Either way, paying everyone the rate of the most costly generator needs to end, it makes no sense at all.

Why doesn't it - that is how much the electricity is worth - there is nowhere you can buy it cheaper.

Are you really proposing to pay renewable generators less than their electricity is worth?  That doesn't sound like a good way to encourage investment in other energy sources?

My thoughts on this are quite simple.  We shouldnt need to encourage private investors to invest in a supply of energy, instead we just invest ourselves as a state, so yes bring energy extraction to state ownership.  There would be a mandate where only excess energy that isnt needed by the UK can be sold off (exported).  Energy supplied for UK needs would be isolated from the open market and not affected by market costs.

I am not sure the private market is fixable, points have been made by others on here, we could remove this very strange pricing model, but the market would likely still end up with inflated prices with the trading that goes on.

Stopping exports could work if we would be a net exporter. But we are not. So if we don't allow the export of energy what could happen.

Other government will react by not allowing energy to be imported by the UK. That would lead to black outs and even worse prices than we can expect now.

You can't inflict trade regulations and not expect other countries to react likewise.

We would still be able to export excess supply.  But the mandate would require us to reduce exports if our demand went up so our demand is fulfilled from local.  As it makes no financial sense to export energy you produce for cheap and then pay for expensive imports.

If we invest enough and set the mandate right we wont need to import.

Norway are doing this soon.

Section62

Chrysalis said:

Think about what you saying and think again.

I thought very carefully about what I was saying when I wrote it, so that won't be necessary, thanks.

The reason to do this is to reduce bills so "the not sure people will want their bills to go up to pay for it" isnt what will happen.

Just believing bills will reduce doesn't stop bills going up.

The idea you are putting forward effectively nationalises energy production and to a large degree isolates us from global markets.

There's no reason to believe that would reduce the cost of energy production.  Unless you have evidence it would of course.

Being part of the global energy (and investment) market creates diversity in the system.  We use that diversity to our advantage in making the system work more efficiently for us.  To a large degree that is the raison d'etre for the common european energy market - we don't need to build so many nukes because we can borrow some of the French nukes when the wind conditions aren't right.

If we detach ourselves from that approach then we need investment not just in the additional capacity we already need, we need more additional capacity than that to substitute for the loss of diversity.  (see below regarding your apple analogy)

This costs us more. The outcome will be higher bills (and/or taxes).

We would have a much lower base cost as profits would be removed, there would be cost on top of that to fund the investment and running costs but the price to consumers would be considerably lower as most of the current costs are added on by the open market.

Prove it.

Its like saying people prefer paying £1 for an apple instead of 40p because they might not like paying some of that 40p on investment costs.

Not really. It is more like saying we don't want to import French apples, so from now on we will grow our own.  We plant lots of apple trees (at considerable expense).  In the first year of planned 100% UK production (some years later), we have an outbreak of Apple Blossom Weevil and 20% of the crop fails.  The price of apples (for those who can find them in the shops) increases from 40p to £1.  We ask the French to sell us some apples and they reply "Non!  Our apples are now being sold to other countries, we have none to sell to you".  The price of apples increases to £2.

Not wanting to get caught out again, we plant more apple trees (at considerable expense) so we have enough to produce 120% of our needs. The farmers producing the additional apples want to be paid whether the apples get eaten or not, so the price of apples (which were back to 40p) go up to 60p. With the additional 20p covering the cost of subsidising excess production.

Then we have an outbreak of fungal apple core rot and 30% of the crop fails....

This apple-related story makes the point that to be sure of having enough you need to find a way of having more to start with.  Which costs money.  Sharing that additional capacity (through trading) helps to keep the additional costs down. Like an insurance policy.

The only long term solution is bringing energy extraction to state ownership or at the very least state control, anything else is kicking the can down the road.  You could increase private capacity by 10x but it would still be at open market international prices.

If you see that as the only solution then I'd suggest you were trying to solve the wrong problem.

I of course do agree we have to make sure we have enough capacity, so invest properly not on the cheap.  But this will still be far far cheaper.

Prove it.

The amount we already need to invest (and is largely funded by the private sector) is mind-boggling.  Further increasing our capacity to produce energy will cost more money, not less.