aidan bell energy market reform
Aidan Bell: radical spirit needed to reform energy market

Ed Miliband’s conference speech shone a well needed spotlight on the cost of living crisis that is accompanying the long overdue economic recovery – and particularly on fuel poverty. The proposed 20 month price freeze seeks to take on the “Big Six” energy companies – and fundamentally reform the electricity market.

What do we mean by “fuel poverty?” The Coalition Government has changed the legally recognised definition. Originally a family was considered to be in fuel poverty if they spent more than 10% of their income on fuel bills. The new definition is that a family must a) spend more than the UK median on their energy bills and b) these energy bills push them below the poverty line.

Regardless of how fuel poverty is defined, the fact is that more and more families – including those on middle incomes – are struggling to heat their homes and, as a result, keep a handle on their outgoings. Reforming the Energy market is a key component of delivering more prosperity to ordinary people.

Energy isn’t the only contributor to the “Cost of Living” crisis. Food and drink is also a large component of the average family budget, but there isn’t the same level of anger aimed at grocers and farmers (though perhaps at the large supermarkets).  So why the anger at the Big Six?

The difference seems to be that electricity and gas are commodities, and with over 99% of the market controlled by six players, the energy market certainly gives the appearance of behaving like an oligopoly.  Companies like Money Saving Expert and the newly created Resolver exist to push back, to create a soft consumer union.

The biggest complaint placed at the feet of the energy companies is that they’re profiteering, putting up prices ahead of wholesale energy price increases.  There has been no direct accusation of collusion, and, it could be argued that in a free market, neoliberal economics produces a perfect price point where shareholder returns are no higher than other equally risky market sectors.  However, the FTSE 100 members of SSE and Centrica are way ahead of the market offering almost zero risk and yields of over 4.5%.  This is great for pension funds, but is it fair to the customers?

Will Morris, group managing director of SSE’s retail business has led the industry’s defence: “Some politicians and media commentators have claimed recently that we value our shareholders more than our customers.  Or to put it another way, we’re focussed on paying them a dividend on their shares, regardless of what that means for our customers.  Nothing could be further from the truth.”  He added: “Without the investment made by shareholders, we couldn’t afford to build the infrastructure or buy the equipment needed to deliver what customers need.”

SSE’s stated principal financial objective is to deliver annual above-inflation increases in the dividend payable to shareholders.  It is the board’s job, and fiduciary duty to shareholders, to make them returns.  The board is performing its duty by denying this fact, because to admit anything else creates bad PR and loses customers through bad PR, thereby diminishing returns and breaching their duty of care.  The problem with this circular system is that it’s bound to result in a lie to someone.

National Grid plc makes a similar return for investors than the Big Six, but is a step removed from the customers’ eye.  Steve Holliday, their CEO said that “short-term interventions” by politicians have badly shaken confidence. “I have not felt things under threat in the way I feel today,” he said.  “There is a perception among foreign investors that the UK has had multiple political interventions and it needs to be careful.”

The threat is thinly veiled: to avoid a breakdown in national infrastructure, let us make as much money as we like.  The present government has heeded this warning, with the sector returns rising steadily.

What about Ofgem?  Surely it has the task of ensuring unreasonable profits are not made?  At the moment, its position is that full competition was introduced into Britain’s electricity retail market in 1999 and therefore rarely intervenes.  After all, the market doesn’t fail.

But if the market cannot deliver prosperity to ordinary British people then hard questions need to be asked about whether the market works at all.  The investment of energy infrastructure is too important to be held to ransom over.  We need a radical spirit to reform our energy market to deliver for the people of this country, not just a few shareholders.  It must be remembered that the price freeze is not, in and of itself, a radical reform. It merely provides a 20 month breathing space to enable the next Labour Government to reform the market.

Exactly how we should best reform the market will be the subject of a forthcoming article.

Aidan Bell is a management consultant and former director of EvoEnergy Limited.

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