MorganEnergy

I’m back from Finland, and slowly catching up on everything that happened while I was away. In the meantime, however, you can all head over to the Menlo Energy Economics blog, where I have just posted the sample article from the July EEnergy Informer. Titled “Time Has Arrived For Time Variant Pricing, But What Kind?”, it looks at how California’s priorities for retail tariffs have changed as the issues facing the state regulators have changed.

The Scotsman reports that the UK energy retailer, Npower, currently owned by Germany’s RWE, is likely to be put up for sale. The German company has hired Goldman Sachs to consider options, which may include an auction. RWE is thought to want to raise money in order to reduce debts, or possibly to finance investment in new nuclear plants. The paper cites Spain’s Iberdrola, which already owns another retail company, Scottish Power, as a likely bidder. This may trigger further consolidation in the rest of the UK energy retail sector, which has for some time been accused of being overly concentrated.

I had a visitor today. He claimed to be from Scottish Power and he needed to read the electricity meter. Although he very carefully didn’t say so, it was pretty clear that what he wanted was to get information about my usage levels so that he could give me a quote with a view to luring me away from my current supplier. I sent him packing, and thought no more about it until I saw a blog post by a friend who had experienced a similar visit.

The difference here is that the meter here is on the wall outside the house, whereas Juliet’s meter is inside the house. Consequently the Scottish Power salesman was keen to get entry to her home. Once again he wasn’t admitting to being a salesman, but instead spouted the nonsense about needing to do a “tariff check”. Because this involved someone trying to get into the house, Juliet not only sent the fellow away, she reported him to the police.

Is this reasonable? Actually I think it is. It is one thing for an electricity salesman to come to the door. It is quite another for him to try to trick his way into someone’s house. Juliet can look after herself (she’s a black belt at something dangerous), but older people could easily be quite frightened by this. That’s particularly so because the British media keep warning us against “distraction burglaries”, where one man distracts the householder with some fancy tale while the other sneaks into the house to rob it.

Given the scale of the operation (Juliet lives quite a long way from where I am), I have no doubt that this was a legitimate Scottish Power sales campaign, though I note that such things are often outsourced to specialist doorstep sales companies so the staff involved, and even the choice of tactics, may not have much connection with Scottish Power. It is, however, a rather stupid campaign, and one that is likely to backfire on the company. I’m writing this post in part in the hope that someone from Scottish Power will see it and ask some hard questions of their subcontractors.

More generally, however, I wonder about a retail market in which these things happen. The intention in opening up residential supply to competition was always to introduce healthy competition to the market. But experience has shown that customers are not interested in switching supplier for any reason other than price, and the savings available are often so small that no one can be bothered – hence the high pressure sales techniques. This new “tariff check” scam is quite mild compared to what used to go on before Ofgem got a grip on proceedings. We might have competition, but whether it is healthy or not appears to be open to debate.

The irony of the whole affair is that I’m currently staying with a friend, and when she got home she informed me that she’s already with Scottish Power, so clearly whoever is running the campaign isn’t bothering to check which households are already sold.

According to the consumer advocacy organization, Which?, energy companies in the UK are getting large amounts of money in interest-free loans from customers. It works like this: customers get a lower tariff if they pay by direct debit, but rather than charging them the correct amount of the bill each month the utility helpfully smooths the pain by charging a flat amount each month. In theory this should average out at the correct amount each year, but the companies generally seem to manage to estimate usage that causes the customer to pay for more energy than they are actually using. Eventually, of course, the money has to be paid back, but in the meantime the utility has been getting a free loan.

For those of us who live in the UK the only real surprise about this is that it has taken people so long to catch onto this scam. Now that Which? has made a fuss, and politicians have noticed, hopefully Ofgem will do something about it.

Coverage of the issue is available via Platts, the BBC and The Times.

Over at Knowledge Problem, Michael Giberson reports that a shake-out is occurring in the Texas retail market and asks whether vertical integration might have been a better option for Texas.

I don’t have Sally Hunt’s book to hand, and I know that there are complex issues involved in this case, but here are some quick thoughts.

1. The end result of vertical integration is a situation like we have in the UK where there is no serious wholesale market in electricity, and consequently much less transparency in the market. Transparency, in general, is a good thing, and I don’t like doing without it.

2. Texas is experiencing a shake-out of retailers because it, like California, made the foolish assumption that the retail market would see enthusiastic and successful new entry. All of the experience around the world suggests that this does not happen. Energy retailing is a business in which economies of scale are everything, and new entry is practically impossible. The Texas market will eventually settle down to a small number of very large companies all of which, I suspect, will also have retail businesses in other states.

Platts reports that a new entrant to the UK’s retail electricity and gas market is offering the lowest duel-fuel deals around, undercutting the “big six” incumbent suppliers.

Well they would have to, wouldn’t they. But will they survive? The UK’s retail energy market has a long history of consolidation by incumbents and failures by new entrants. First:utility will need to have something special to offer if they are to survive in a market where economies of scale are everything. Looking at their web site, it appears that their edge is intended to come from smart metering and encouraging demand management on the part of their clients. Presumably that means that they’ll be able to buy more baseload power and less peaking power than their rivals, hence the lower average charge.

We shall see. I wish them luck, but it is a tough market. Their biggest challenge might be to convince potential customers that they are not going to be out of business this time next year.

There is another new paper out from the Center for the Study of Energy Markets at UC Berkeley. This one, titled “Equity Effects of Increasing-Block Electricity Pricing”, is by Severin Borenstein, and it looks at how successful the California government has been in designing a tariff system that will help the poor. Here’s the abstract:

Utility regulators frequently attempt to use tariff structures to pursue both distributional and efficiency goals. Efficiency necessitates setting prices as close to marginal costs as possible while still allowing the firm to cover its costs. The common distributional goal is to protect low-income customers from high prices. Perhaps nowhere is the conflict between these goals greater than in the use of increasing-block residential utility pricing, in which the marginal price to the customer increases as the customer’s usage rises. Since the 2000-01 California electricity crisis, the state has adopted some of the most steeply increasing-block tariffs in electric utility history, but the distributional and efficiency effects have not been analyzed in detail. Using a novel approach for matching customer bill data with census data on area income distributions, I derive estimates of the income redistribution effected by the increasing-block tariffs used by California regulated electric utilities. I find that the rate structure does redistribute income to lower-income groups, but that the effect is fairly modest, particularly compared to a means-tested program also in use. While the distributional impact of these tariffs do not seem to be large, the efficiency costs may not be great either. Examining the distribution of customer demand quantities, I find preliminary evidence that customers do not respond to the increasing marginal prices they face.

You can read the full paper here, but if academic rigor is a bit much for you CSEM also publishes their Research Review magazine that explains recent papers in plain language. The latest issue has just been published. In addition to the Borenstein paper, it also has articles on:

• Time to Push Energy Conservation AND Energy Efficiency; and
• Permits to Pollute: Insights on How to Design a Pollution Market

The magazine is available as a free download here.

Several UK papers are reporting (here, here and here) the story that Marks & Spencer are to go into the energy retail business. This probably means little outside of the UK, unless you happen to know ex-pat British women who insist on going back home to buy their underwear (M&S undies are legendary), but it is an interesting development.

M&S is one of the few retail chains in the UK that has made a success of selling premium product. They consistently get away with charging more for their clothes and food on the grounds that they provide better quality. And their electricity deal with Scottish & Southern Energy explicitly sources the power from hydroelectric stations. As I noted last week, Ofgem has found the UK consumers are overwhelmingly focused on price when they buy electricity. The idea of paying more for “green” power simply doesn’t appeal to them. But if any retail company can make a success of selling a premium energy product it will be Marks & Spencer.

Since February of this year the UK energy regulator, Ofgem, has been conducting an inquiry into the prices charged to retail customers. Their report was released today. The text is available online here. Ofgem has not found any evidence of price fixing by retailers, but it has raised a number of concerns about the market. Here are a few highlights.
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Party conferences are always a time for posturing and staking out of positions. Thus far the Labour Party has refrained from requiring Gordon Brown to fall on his sword, but with opinion polls predicting an electoral disaster of unprecedented proportions there is plenty of rushing around looking for policy positions that might revive the party’s flagging popularity.
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