Friday, November 24, 2006

Anomalous serious post (here's a topic you're welcome to rant about)

Things aren't always as they seem, eh Madge?


Working in the UK utilities industry (gas/electricity/renewables), one of the questions I am asked with irritating regularity, usually posed to me in an aggressive tone as if I alone were responsible for the horrendous price rises over the past couple of years, is "How the fuck can you cunts justify whacking on a 10/20/30% price-rise on electricity to the customer? It's ridiculous and unfair, considering the enormous profits you guys already make."

The problem with the answer to this is that I can't give a simple response, so people end up losing interest half-way through my explanation, content to bathe in the vitriol of their chosen viewpoint rather than consider that perhaps there's a valid reason behind this after all. If this is a topic that interests or concerns you, bear with me and I will try to explain how it works, albeit on a very simplified level.

If it doesn't interest you, fuck off and read some of the fluff below.

My comments here refer to the UK utilities industry, but the ESB in Ireland is organised in roughly the same way.

The electricity industry is divided into three main areas: Networks (aka Wires/Transmission), Wholesale, and Retail. The networks industry is concerned with the infrastructure used to supply electricity from the power station to our homes and businesses. There are few players in this industry, for obvious reasons: pylons and overhead cables are rather unsightly items; if companies were given free rein to build their own infrastructure, there would be a mass of ugly power cables criss-crossing the land. Therefore, the networks industry is tightly regulated so that each area of the country is managed by one company. This company is wholly responsible for the wires in this area.

To prevent anti-competitive behaviour, there are equally stringent regulations in place in the next area: Wholesale. These regulations prevent favouritism; for example, if my business manages the network in this area, I'd be tempted to sell electricity to the wholesale side of the business for less than I sell it to our competitors, thereby increasing profit margins. However, this is velly velly illegal (as fatmammycat might say), punishable by enormous fines and the like.

The upshot is, at any given point in time, all companies buying wholesale gas and electricity must be charged the same amount for it. The trick is in knowing when to buy and when to hold off, a practice known as hedging. Some companies are brilliant at hedging, and this makes the company serious dough. Taking a common example: currency. Say a pound is, right this second, worth two dollars. If you buy a million pounds worth of dollars, you then have two million dollars. Five minutes later, the dollar price drops and a pound is only worth a dollar fifty. You sell your two million dollars, but because the dollar has strengthened against the pound, you make back £1,330,000, or an extra £330,000 on your initial one million investment.

The figures used there are kind of extreme, but you get the idea. Market fluctuations means this happens hundreds of times every day, and the key is knowing when to buy and sell. The exact same rules apply to the wholesale business buying electricity.

Networks and wholesale are known as the regulated industries, because they are strictly governed to ensure they're run fairly. The third area of the electricity business is completely deregulated, meaning it's a free-for-all out there in the market. The third area is the customer-facing side of the industry: retail.

This is the side of the business the average man on the street is familiar with. You know all the big and not-so-big names, I'm not going to list them. You've seen the ads with all of them telling you they're the best. I'm not going to argue. The beauty of modern regulations is that, unlike years ago, we're now free to choose who supplies our electricity based on which company is cheapest for us.

All of the above is a background to give an explanation as to why the cost of electricity is increasing. Put simply, the fuels (coal/gas) used to power the stations used to transmit the electricity to your home and business are becoming scarcer and more costly to mine (deeper, harder to find). Therefore, the power station is charged more to buy the coal/gas. Therefore, the increased cost of producing electricity must be reflected in the wholesale price of the electricity.

Due to the factors described above, the wholesale price of electricity has increased enormously over the past few years. Clever well-managed hedging allows businesses to make profits in the wholesale area, but it is inevitable that such price increases will eventually be passed on to the customer. The industry does not take this lightly, but the fact remains that it has to be done. My company, though it makes good profits, actually makes a loss when you look at the retail side of the business on its own. This is considered a necessary evil to keep customers happy.

It needs to be understood that traditional means of generating power will, probably in our children's lifetimes, no longer be viable. Tens of millions of pounds are invested every year into ensuring that renewable sources of energy, like wind turbines, are created, but not enough's being done. Part of this is a cultural problem, part of it is lack of support from the government. The government have seen making promises regarding renewable energy as a vote-loser, so rather than drive the issue, they've proposed penalising the industry with huge fines if targets aren't met by certain deadlines. The industry needs support to achieve its target, rather than penalisation in the event it doesn't, if it's to be successful in developing next-generation methods of energy production.

On the cultural side, you've got the NIMBY folk who on one hand are clamouring for something to be done about the situation, and on the other are saying, "Oh no, no wind farm in my area, those things are ug-lee." You can't have it both fucking ways.

And finally, the industry themselves need to speak up. I can't for the life of me understand why this isn't explained in layman's terms to people. It's not like it's a secret - any of this info I spoke of is in the public domain. It's just that it's usually described far too technically for people to take it in. The industry needs some good PR people to explain the situation.

Anyway, I realise I will be lucky if more than two people read this far, but it's something I needed to spill out. I'll come back and check this for sense later, but for now, what you see is what erupted from my mind.

Just to clarify: I'm not claiming everything here to be 100% accurate, and my views are entirely personal and don't reflect those of my company or the industry. All the shite I spout here is just opinion.

HAVE A SPECTACULAR WEEKEND.

33 Comments:

whyioughtta blathered this crap:

Very interesting, Kav. So...why do you guys charge so much again? (Kidding)

Here, electricity regulation is decided by each province. Ontario deregulated a few years ago, and man, that was total chaos. People's hydro bills went up something like 400 percent, I guess because they were finally paying the actual market price, not the government-subsidized price. In a way, that's a good thing because it motivates people to conserve. For crap's sake, we shut down part of the North American power grid with our air conditioning demands a few summers ago.

I agree a thousand percent that it's time for people, governments, etc. to get real about where electricity comes from...it's not a little magic elf in your plug-in box; it's the earth, and she's got no more power, cap'n.

Kav blathered this crap:

Yeah, the government stepped back from subsidising electricity and gas a while ago here too. The exact same thing happened. People asked for a choice, they got it, and then they complained when the price rises happened. If they'd never kicked up such a fuss in the first place, it wouldn't have happened.

Cindy-Lou blathered this crap:

Uh, did you say something about a wind farm? Those things are ugly!

I kid.

But I'm still not reading this all the way through. I'm just a bitch like that.

Marika blathered this crap:

We have one wind farm here in Victoria, Australia, and I actually think it's beautiful. I really don't understand what the fuss is about - it's clean, it's cheap and quite frankly I'd rather live next to a wind farm than a coal-smoke-belching power plant. They tried to build another one about 6 months ago but that plan was squashed because the land they had targeted was the last remaining habitat of the yellow-breasted-election-bird, or something like that. There's also a big debate here about whether to go nuclear, but I haven't made up my mind about that.

I work in insurance and there's nothing quite like that for chasing away any chance at a decent party conversation. "What do you do?" "I work in insurance." "Oh, I'm so sorry." etc. I follow our markets quite closely and I find it fascinating, but generally, I'm not allowed to talk about it in public, or I risk never having another friend again.

Old Knudsen blathered this crap:

Now my head hurts like fuck, I thought I had it for a moment but then I started to look at the 3 pairs of tits (again) fake or not the ones on the right are the best. When people find out that I'm a doctor they always ask me about some injury they have or illness.

Fat Sparrow blathered this crap:

"If you buy a million pounds worth of dollars, you then have two million dollars."

I'm pretty sure you'd have more than that; the paper they use for our money is not all that heavy.

:::ducks and runs:::

Nah, people are still pissed off here about Enron. Once it's gone public that companies are actively trying to fuck you over, people tend to be a leeeeettle bit suspicious after that.

We've got wind farms here out in the desert, and are likely to get more, as not to many people complain, thank fuck. What really chaps my thighs is the fact that we have sunshine here 400 days out of the year, and yet no one considers solar a viable option. D'oh!

Mairéad blathered this crap:

I read that in Spain new houses must put in solar panels. Makes big sense.
In Ireland, shortly, houses are going to be given a rating according to their use of renewable energy, heat retention etc... Wood pellet stoves and solar panels are becoming more popular. They're very expensive though, and even though the Gov gives grants for them, you'd still be a decade or two recovering the costs.....so I don't know if they'll really take off???? Maybe people will think of the environment instead of their pocket? Yeah, right!

Sassy Sundry blathered this crap:

There's a move to get a wind farm not far from here, but the whole NIMBY thing is in full swing.

Sounds like a drag trying to explain that all the time.

Steph blathered this crap:

I love it when you get your rant on.
I didn't read it all. I have the attention span of a gnat. You typed it well though ;)

Dr Maroon blathered this crap:

Just read the fucking meter willya?

Amanda blathered this crap:

Is it not up to the industry to push forward on renewables? They are the ones with the demand to meet and profits to make. Not the government.

Old Knudsen blathered this crap:

So Kav are like a window cleaner or something? sorry vision technician.

Kav blathered this crap:

cindy-lou: I don't blame you for not reading it. I wrote it more to have a record of that stuff than anything else. I get so tired of trying to explain it all the time...you can prob see why.

marika: I know what you mean. I used to always preface my response to that question with "Well, it sounds really boring, but I work in...". Now, I just don't care.

knudsen: Speaking of which, that cream you prescribed me for the rash didn't work.

fat sparrow: Interesting you should say that. The area I work in (Sarbanes-Oxley Compliance) was actually introduced as a direct result of scandals like Enron, WorldCom and Tyco. The regs are so tight these days that getting away with anything like that would be almost impossible anymore. (Assuming the regs apply to the company - they only affect companies of a certain size and trading on the stock exchange.)

mairéad: That's the problem, isn't it? It's far too difficult to think beyond the short term.

sassy: Tis indeed exhausting.

steph: As I said to Cindy, I didn't expect it to be read by many. Cheers though!

dr m: That'll be £67.50 please.

Amanda: Absolutely, I agree 100% that it's an industry responsibility. However, what I disagree with is the governments approach. The government have a responsibility to lobby society into understanding why we need to change how our energy is produced - the industry cannot do it on their own. However, what the government has chosen to do (since they don't see discussing climate change as a topic that wins votes) is to put in place penalties on the industry whereby if they have not achieved certain targets they will be find huge sums - effectively using the development of renewables by the industry as an axe to grind them with rather than a means to enhance and develop their future. If the government proposes imposing such penalties, then the least they should be doign is working hard to ensure that the electricity supply industry is given the support and visibility it needs to accomplish its goals.

PHEW. I am exhausted.

Kav blathered this crap:

Gah - that should say "fined huge sums" up there, Amanda.

Amanda blathered this crap:

ah, sure that's grand, I'm dyslexic anyway so it looked all right to me till you pointed it out.
Good points, well made.

Kav blathered this crap:

Ah knudsen, how did I miss you earlier? I am what they call a Meter Point Analysis Engineer, Grade 1. It's what you lay people refer to as a meter reader. Grade 1 means I am allowed to write the numbers down in the notebook. I served 18 years as a Grade 2 (Assistant MPAE) before I got promoted.

Fat Sparrow blathered this crap:

You should get a job in the porn industry, Kav, that way people will always be happy to hear about your work.

Kav blathered this crap:

My lad's not enormous enough to get paid for porn, Slim.

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