Ofgem review of electricity pricing structures

[Jeremy Harris]

I've just been reading the latest (rather badly put together) update on the review that Ofgem are undertaking looking at electricity pricing, specifically the means by which the "fixed" element of the network cost is recovered.  The latest update (from yesterday) is here: https://www.ofgem.gov.uk/system/files/docs/2017/11/tcr_working_paper_nov17_final.pdf  and I think they are way off the mark in the way they are looking at the costs of recovering the fixed operating cost element.

 

We have a market that has been wholly artificially created by government, who have arbitrarily decided to divide electricity supply into three main sectors; those responsible for generation, those responsible for network provision, updating and maintenance and those responsible for selling electricity to consumers.

 

In the first and last instance, a semi-competitive market exists.  Anyone can invest in becoming a generator, in essence, it's pretty much a free market, with some constraints in terms of regulatory interference aimed at retaining a reliable mix of generation sources.  Similarly, anyone can invest in becoming and electricity retailer, a somewhat simpler task that becoming a generator.

 

Stuck in the middle we have a major lump of the fixed cost element, and this is not competed at all, it is divvied up into Distribution Network Operators that have a monopoly in their particular regions.  It seems that it is recovering the costs incurred by these monopolies is thing that is vexing Ofgem, with them suggesting alternatives to the fixed daily standing charge as ways of covering these "fixed" costs.

 

I'm not at all convinced that they are going about this the right way.  There seems little incentive to make the DNOs more efficient, and consumers have no control at all over DNO imposed charges that form a part of their bill.  My personal view is that a good starting point would be to remove the standing charge system completely, and therefore force those who use more of the network capacity (the high users of energy) to pay more towards the maintenance and upkeep of the network.

 

It'll be interesting to see how Ofgem are steered and directed by the energy industry to deliver a more profitable scheme, as I'm certain that is what the outcome will be, as Ofgem seems a pointless and toothless body that is little more than a talking shop to allow the industry to do as it wishes.......................

[ProDave]

Slightly related to this, the Scottish government announced is is to launch a "not for profit" energy supply company, the theory being if you eliminate the profit, then consumers will get a rate closer to the wholesale price. It will be interesting to see what that offers when it launches.

[SteamyTea]

I have not read the report yet.  But it is that 'bit in the middle' that is a problem.  The retail part makes very modest profits, and so far has not been bailed out like the banks and railways.

Read that SSE and nPower may merge to take on British Gas.  That could be interesting as SSE and nPower have both been loosing market share.  Not that Market share is in the least bit important to the consumer or the casual investor.  Profitability is the important bit, you need to stay afloat.

I too think that the only way to get the investment needed to charge by the MWh only and then the DNOs can chase the billing companies for the cash.  Trouble is we will probably end up with a system that tries to divvy up the costs between the generators, the wholesalers and the retailers and then stick some time/load dependant 'congestion charge' into the mix for a laugh.

 

If only governments would keep things simple and understandable. 

Edited November 7, 2017 by SteamyTea

[AliG]

The paper very clearly comes out against "volumetric" charges and I have to agree as regards network costs.

 

Many of us here, me included, have reduced out electricity usage via the use of solar panels as well as energy efficient lights etc. However we still need access to the network as we do not generate all the power we produce.

 

Give or tale the cost of providing network access to a property is the same irrespective of how much actual electricity they use. If we did away with the standing charge people who are higher users of electricity will end up paying more than their fair share.

 

You could of course use batteries to totally leave the network and then you would not have to pay a standing charge which would be fair as you would not be using the network.

 

An electricity network, similar to a phone or rail network does not lend itself to competition as the costs of building extra networks are prohibitive relative to the benefits of competition. Generally these are regulated by some kind of rate of return mechanism along with a savings sharing mechanism. I feel that this has worked well for utilities and it is used in many countries including here. As companies can earn a return on capital investment and keep some efficiency savings whilst sharing them with consumers if properly applied it should work.

 

I am less clear on whether residential customers should pay for fixed generation costs. They don't currently. I believe that they have steadier and more predictable demand than industrial customers and so this charge has not been deemed necessary. I am surprised to read about this as I thought proposals were to move to more variable pricing which would tend to smooth out demand and would reduce the need for these charges.

 

I do agree that most of these regulators are a waste of time. I don't know why we need this review at all, but no doubt it keeps them all in a job. Just across the river from my office in London are the OFCOM offices right on the Thames in central London, Motablity is in the next block. What a waste of money. These quangos should have gone in the bonfire of the quangos. 

[Jeremy Harris]

I was thinking about this last night, and I believe this is a problem only because of the the way the electricity supply industry grew, and was mainly a consequence of it being a nationalised industry for so long.  What we call the standing charge was originally (and still is, officially, I believe) called an "availability charge", a charge for making a product available to you.

 

Every consumable supplier has fixed network costs, be it the oil supply chain for oil fired heating, the fuel supply chain for fillings stations or the food and household goods supply chain for shops and supermarkets.  None of those would dream of charging an "availability charge", there would be a public outcry if they did.  In many cases, the supply chain and distribution networks for all these non-electricity supply businesses are far more complex than the generator - distribution network - reseller model that electricity uses.

 

I can see no good reason why the fixed cost elements should not be amalgamated wholly within the product cost for electricity, just as it is for every other product we buy (with the sole exception of gas, another anomaly like electricity).  After all, if it can work for someone with oil or LPG fired heating, why shouldn't it work every bit as well for electricity or gas?

 

The general principle of every consumer paying the true cost + profit of the product they are buying, with no distortion created by government interference seems a sound one to me, and it provides an incentive for heavy users to look at ways of reducing their consumption.  I find it ludicrous that the 6 bedroom, stone built, electrically heated Victorian rectory just down to the road from me pays exactly the same standing charge to cover the network cost as I do.  At a guess that house uses around 5 or 6 times the network capacity, so places a heavier burden on it than most other houses in the village.  If I had two or three phone lines, I'd have to pay extra for the additional network cost, so if we are going to keep standing charges, why not scale them to usage, at least?

[jamiehamy]

I often walk by the Motability office and wonder why they need such a prime spot given the cut backs. Similarly for Sally Army just over the river although I've been told there are 'deals' with corporations which mean the land/office space is an investment and charities get to benefits from it as well as the corporations. Anyway... Never mind! 

[SteamyTea]

I have had a quick read though that document, and it would take many more reads to understand what they are talking about properly.

 

Two things that crossed my mind is that they talk about forward investment and energy reduction.  If energy usage was reduced significantly, future investment would be lower, this would lead to less of a problem about billing.

 

Apart from that, I really don't think it makes tom tits difference how the distribution billing is implemented.  If they want more revenue, they need to up the price, if they want more control, they need to up the price, if they want fairness, they need to up the price somewhere.

 

Purely as an aside, I am in Halifax NS at the moment, since I have been here (about 3 weeks), there has been two major unscheduled power cuts that have lasted several hours.

This is more than I have had down in Cornwall in 15 years.  The weather has been superb, days up in the 20°C and little wind or rain.

The UK really does have a fantastically robust National Grid and we should be holding it up to the world as a beacon of engineering prowess.

The Nova Scotia power has a time of day rate system that varies by time of year as well.  https://www.nspower.ca/en/home/about-us/electricity-rates-and-regulations/rates/domestic-service-TOD.aspx

Meter charge is just under C$11/month.

They don't pay much for power here, especially when you consider they earn more.http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/labr69a-eng.htm

 

 

[PeterW]

@ProDave you may be interested to know that there is a new not for profit energy company owned by Nottingham City Council - aptly named Robin Hood Energy ..!

 

its also the provider to Ebico, as they have a better “alignment of ethos” than they had with SSE apparently. 

 

NCC used to have a small scale generation capability which I’m sure has gone by the wayside however since I switched to Robin Hood I’ve not heard from them at all - it’s one of the few that have a no standing charge tariff now. 

 

Taking your point @JSHarris, the standing charge is no longer designed to do what it was created for as it only worked when the DNO and the Retail arm were part of the same company as it covered their standing costs for networks. I’ve seen a variation of 100% in the charges levied by the same companies dependent on tariff and it’s just barking mad ..!

 

And if you think electricity is hard, wait til they deregulate domestic water .......! 

 

[ProDave]

7 minutes ago, PeterW said:

@ProDave you may be interested to know that there is a new not for profit energy company owned by Nottingham City Council - aptly named Robin Hood Energy ..!

 

 

15.467p per Kwh does not sound blindingly cheap to me.

 

It perhaps confirms my suspicion that some of the cheap deals on offer are only possible because they are subidised by those paying less good tariffs.  Take away those less good deals and the cheap deals go as well?

[Jeremy Harris]

1 hour ago, ProDave said:

15.467p per Kwh does not sound blindingly cheap to me.

 

It perhaps confirms my suspicion that some of the cheap deals on offer are only possible because they are subidised by those paying less good tariffs.  Take away those less good deals and the cheap deals go as well?

 

 

If you want a laugh, look at the tariff Ovo have "especially for electric vehicle owners".  The standing charge is an absolutely massive 28p/day, and the unit charge is around 14p/ kWh

Edited November 8, 2017 by JSHarris

[SteamyTea]

That is how it should be.

They are going to use more, so need to start paying the true marginal costs differences and pay for the extra infrastructure.

 

[Jeremy Harris]

10 hours ago, SteamyTea said:

That is how it should be.

They are going to use more, so need to start paying the true marginal costs differences and pay for the extra infrastructure.

 

 

 

The reality is that the additional usage from electric vehicle charging isn't massive for most home charger installations.  Home charging is almost always just the daily commute charge, which for most people might be between 5 and 10 kWh for 5 or 6 days a week.   People running E7 systems probably use much the same sort of energy, per day, more in winter if they still have storage heaters, so they should pay a similar high standing rate.

 

There's also the issue of people like me, who do the majority of their EV charging from self-generated energy.  I can't see why I should have to pay a higher standing charge for energy that I generate from my own "network" investment.

 

Getting rid of the fixed charge and just adding it to the unit price makes it much simpler, and, in my view, fairer.  Those with a high demand will pay more, and contribute more to the infrastructure needed to support that high demand, than low demand users.

Edited November 9, 2017 by JSHarris

[SteamyTea]

Part of the trouble is, that with FITs, you can have two energy suppliers in effect connected to the same meter.

What is hard is whether it is best to charge customers for the right to connect, like a shopping club, or just charge them more for the product because they are not members.

If the later, then there should be a charge for connecting home generation.

It is really about what the charges should be, not if people should be charged.

[Jeremy Harris]

I agree about the argument being primarily one about what the charges should be, and my concern at the moment is that we don't have a very effective mechanism in place to collect the revenue needed to fund the required infrastructure costs.

 

If shops were to charge an access fee at the door, which is exactly what gas and electricity companies do, in effect, then I bet a fair few people would be up in arms at the idea.  Yet, in principle, that's an equally viable way for a shop to recover it's infrastructure costs.

 

I would rather the regulator just removed the concept of standing charges altogether, as they are just a hang over from pre-privatisation days.  It's notable that the practically the only things with standing charges, gas, electricity and telephone connections, and all were once nationalised industries............

 

 

 

 

 

 

[SteamyTea]

There was a bit about a decade ago that Blue Water (Thurrock) wanted to charge shoppers for entry.  They already do this for most people with car parking charges or public transport costs.

Very little we do does not have some kind of barrier to entry, just that we don't often think of it that way.

If you take motoring, then the barriers are actually very high, cost of licence and renewal, driving lessons, test(s) vehicle testing, taxes, insurance, maintenance, disposal, fines.  And that is before we pay for fuel.  Then there are the discretionary spends on the vehicle, better trim, winter tyres, roof boxes.

It is the same with a trip to the beach.  Entry to that may be free, but it has a cost to get there and quite often once you are there.

 

They could try varying the meter rental charge by the amount that passes though it.  That would be considered, but it is really very simple and very low users would pay very little, just enough for replacement, reading and administration, plus the pro-rata amount for network maintenance.

In some ways it is better to make a system like this as it highlights what the money is for.  If you lump everything into one, non itemised bill, then people assume that there is a lot of profit making.  And that is not the case with retail energy.  It is an old and mature marketplace that run by legislation and has very little room for true savings.

 

[Jeremy Harris]

Apart from the political (and public) outcry, there's a good argument for just increasing the cost per unit to a level to cover all the fixed and variable costs and have done with it.  Not only would the tariffs be easier to understand, but those who use the most would pay the most, those that use very little would pay very little.    As the unit price would be higher, there would be a greater incentive for people to reduce energy use, just as there is with fuel prices and the economy of cars.

[Gone West]

18 hours ago, SteamyTea said:

There was a bit about a decade ago that Blue Water (Thurrock) wanted to charge shoppers for entry.

Bluewater is at Greenhithe, Kent and Lakeside is at Thurrock, Essex. Both currently have free parking, but for how long who knows.

[Jeremy Harris]

FWIW, I think bringing parking charges into the argument may be a bit of a red herring, anyway.  Parking charges seem to be set to cover the cost of providing car parking, be it by retail outlets, specialist parking facility providers or local authorities.  They are not set to recover the distribution and fixed costs of retailers, AFAIK.

 

The closest analogy we have to electricity and gas supplies to the home are oil and LPG supplies to the home, and fuel supplies to filling stations for vehicles.  None have a standing charge, although some LPG suppliers may charge a storage vessel rental charge, if the vessel isn't purchased outright.  AFAIK, this rental charge only covers the cost of the vessel, not the cost of their distribution and delivery network.

 

Why do we have this strange anomaly where it's acceptable for a fixed daily charge to be levied just to make electricity available to a home, irrespective of whether that home uses any electricity at all?

[SteamyTea]

2 hours ago, PeterStarck said:

Bluewater is at Greenhithe, Kent

You are right, Lakeside was where I got stuck in the lift and realised that I had been claustrophobic for years.  Why did no one else think that smashing up the doors (unsuccessfully) to get out was not a rational thing to do.

1 hour ago, JSHarris said:

FWIW, I think bringing parking charges into the argument may be a bit of a red herring

The point I was making is that there are often charges to enter a market for both suppliers and customers.

Council tax is one of them.

VAT is another.

[Jeremy Harris]

Taxation is subtly different, though, as it's generating revenue for public services,  not generating revenue for a series of business enterprises (although one could argue that there are a lot of accountants and financial advisers who make a pretty penny from advising the wealthy as to how best avoid paying tax!).

 

In this case we have the anomaly where some types of energy supply have a fixed availability charge, and some don't.  There's little intrinsic difference, for example, between the supply of central heating oil and the supply of electricity of gas.  All have production/generation facilities and all have pipeline/cable distribution networks.  The only real difference is that oil has a truck for the last few miles of the delivery network, but that is a pretty small part of the overall fixed/distribution cost part of central heating oil supply, probably on a par with the cost of meter reading for gas and electricity.