Thursday, 31 July 2014

Don't Try To Fix What Isn't Broke

I didn’t plan on writing a Blog post this lunchtime, so let’s make it a quickie. Just now I’ve been listening to Jeremy Vine on BBC Radio 2 lightly grilling one of the executives of one of the big six energy firms (sorry, didn’t catch the person’s name, nor his company, as I missed the beginning). The issue is based on this bit of news - quoted from The Guardian:

“The energy watchdog, Ofgem is predicting that energy suppliers will make £106 per household over the next year – almost 5% more than it forecast a month ago. Dermot Nolan, the chief executive, said he wanted to see this reflected in lower bills as falling wholesale power prices increase company profit margins. "If the market is operating efficiently, you would expect to see competition pressing down [household] prices."

Yes and no. While it’s true that if the market is operating efficiently you would expect to see competition pressing down prices, that fact is also counterpoised by the reality that scarcity of supply chokes the market mechanism more than most people understand. Due to the market knife-edge on which energy supplies sit, energy companies cannot easily risk insolvency by simply lowering customer prices conterminously alongside wholesale price drops, because energy companies do not buy in accordance with the fluctuating wholesale prices we observe in the domestic sector – they make huge investments over several years, during which the market is susceptible to significant fluctuations (this alone shows the idiotic short-sightedness of Ed Miliband’s popularity-mongering energy price freeze proposals).

Competition makes an industry healthy, but I have a feeling that, while it’s completely understandable, in the energy industry consumers are often to blame for not making the most of competition. In the food industry, if Budgens becomes too expensive, people switch to Tesco; if Tesco becomes too expensive they switch to Aldi. It is easy to switch food providers – all you need to do is drive to a different supermarket. But while it is similarly not that difficult to switch energy providers, the time, research, asymmetry of information, and technical nous required (many people still don’t operate a computer) to take full advantage of competition is often prohibitive unless people are willing to invest the time to be price sensitive (a luxury not everyone has). If a survey was conducted that recorded the number of people who’ve switched supermarkets compared with the number of people who’ve switched energy suppliers, I’ll bet the former is astronomically higher than the latter.

Let me paint you a Guardian-reader fantasy that will probably seduce and titillate: Ed Miliband becomes Prime Minister next year and passes a law insisting that all providers enable customers to benefit from similarly low prices. That would be better for the energy market, right? Wrong. Imposing the lowest tariff on your own consumers stops competitors offering more competitive (and innovative) strategies. And not being able to attract new customers at a discounted rate relative to your existing customers disables the very quality of competition in the first place. Also, energy suppliers would not be able to compound their discounts to larger customers whose energy use far exceeds the ordinary domestic home. Uniformity drives out the best methods of ingenuity – and the continual misunderstandings about energy prices, profits, and what drives them, leads to this fruitless “If it’s not broke, don’t fix it” preoccupation.