Energy Market Chaos

Copyright Philippa Roberts 2012

There are so many things that were wrong with David Cameron's announcement yesterday during PMQs that all energy companies will be forced, through legislation, to put all consumers on the lowest tariff, that it is difficult to know where to start.  FT has a good article on it, but I think there are three key things that are wrong.

Firstly, is the fact that it seemed to take everyone by surprise, including the Energy Department.

Secondly, is the fact that this is so ill-thought out in terms of the impact on the lowest tariff, as I've blogged about before here.  In a market with a single product and legislation that means you have to offer everyone the lowest tariff, it is going to be hard to argue for more than one tariff.  Without further legislation to then cap this tariff, there is no logical reason why a profit-driven company wouldn't make sure that the new 'lowest' tariff is higher than the current lowest tariff.  The consumers lose.

But my third issue with the announcement is the fact that is seems to fly in the face of a belief in free markets and competition.  The central tenet of the competition argument is that consumer choice improves service levels and reduces cost as we all move providers based on rational decision-making and full information about what is available.  Exactly a year ago there was an Energy Summit at Number 10, when the main energy companies, the Big Six, where upbraided. A review of competition in the energy market has found many faults, including poor supplier behaviour.  Yet, according to Which? the average household is paying 13% more than a year ago for its energy bills.  There is plenty of evidence that the market isn't working well, and that Government action so far hasn't changed that.

However, the announcement yesterday flies in the face of everything one would expect from this Government, by essentially killing competition in the energy market.

The strange thing about this is not just how confusing it is from an ideological point of view, but also how confusing it is in practical terms.  Poor Ed Davey, the Energy Minister was making a speech yesterday where he said:

"The coalition is absolutely committed to getting these reforms right, through legislation and through the signals we send.  We have listened to investors and today have set out further measures to provide the certainty they need to make decisions.."

At a time when the economy could be growing, investor uncertainty comes from a Government that doesn't have  a coherent plan.  Legislating against competition when you say you believe in it, and are pushing it in other areas such as water, just doesn't make sense.  No wonder everyone is struggling to explain what it all means today.  Think it deserves the same picture as the last blog - dark clouds on the horizon!

Return to the 70s

Stormy weather ahead? Copyright Philippa Roberts 2012

There's a short article in the FT today, suggesting that stagflation could be rearing its ugly head.  I've always thought it was an ugly word for an unpleasant situation - one where growth is low or non-existent, but prices are rising.

It's worth remembering that the Bank of England has a remit to keep inflation at or below 2%.  It has now missed this target for the whole of the last two years.  Figures this week show that inflation has fallen and are seen as a good news story, but it still runs at 2.2%.  And this is at a time when the economy is shrinking.  

The OBR has also published its latest data today, which shows that growth was recovering well in June 2010.  But that it isn't now.  Thanks to @faisalislam for his useful annotation of the key diagrams on twitter this morning.  As he's tweeted today, he's not making a political point, just demonstrating where the recovery ground to a halt.

That said, I also read somewhere (can't remember where now to link to it) that we are currently more optimistic about our situations than at any other point since 2007.  Apparently 29% (if I've remembered that right) of us think our financial situation will improve in the next 12 months!

I feel very lucky to be running a business that is growing at the moment, but am horribly aware of how quickly that positive cashflow can disappear.  I'd like to recruit, but don't want to take someone on if I can't be sure I can still employ them in 12 months time.  Getting rid of their employment rights in exchange for a share in the company isn't going to help either! A break from National Insurance payments might though.

In the meantime, let's hope that inflation does slow down and recovery does reappear.  The 70s were a fairly grim time, for lots of reasons, let's hope stagflation isn't the thing from that decade that comes back in fashion.

Should We Be More Like China?

All is not what it seems.  Copyright Philippa Roberts 2012

David Cameron in his speech to Conservative Party Conference today talked about China.  I got the impression that he was asking whether the British economy should be more like China, which is
"creating a new economy the size of Greece every three months".

Now, putting that claim aside (at least until Tim Harford or FactCheck come back and tell us if it's true or not), is the Chinese economy one we should be aspiring to?

Last year, China's GDP was 9.3%.  This looks really impressive, especially when compared to our growth rate of 0.8% in 2011 (OBR figure in March 2012 forecast).

In fact, only in the last week the IMF has revised its growth figure for the UK downwards, from 0.2% to -0.4%.  It was only three months ago that it was saying 0.2% growth was possible this year - now it's saying the economy will continue to shrink.  The 0.2% growth prediction was clearly more realistic than the Office for Budget Responsibility, which predicted 0.8% for 2012 in November 2011, and stuck by its guns in March this year, also saying that:

"We still expect the economy to avoid a technical recession with positive growth in the first quarter of 2012."

Obviously now, after three consecutive quarters of the economy shrinking, that doesn't look like a good call, but as JK Galbraith famously said:

"The only function of economic forecasting is to make astrology look respectable."

That's a slight distraction.  As I was saying, copying China looks like a good idea, if you just take a snapshot of growth figures.  However, as I've mentioned before China is slowing.  Growth this year is predicted to fall to 7.7% and it looks like the July to September quarter will be the 7th in a row when growth has slowed.  Some commentators have been writing about the property boom in China, including this in the FT.  This property boom has come on the back of cheap credit and the now-expected property bubble sounds remarkably like the model that has just got us into our current mess.

The UK has a mature economy.  We industrialised over 200 years ago.  Many would argue that our economy was declining from the turn of the last century, but that this was disguised by two world wars.  Our average growth rates will never now be the same as those currently seen by China.  To make comparisons between growth in countries in Europe and China is to ignore the different economic histories, and makes no sense.

So I don't think we should aspire to grow like China.  We could aspire to green our economy at the rate China is greening theirs, invest in renewables with the same seriousness, but their model is not one which will fit us.  I'm still waiting for the vision of what our economy, a sustainable economy, will look like.

What Money Can't Buy

Michael Sandel Sept 12, Labour Party Conference

Really enjoyed the talk by Michael Sandel from Harvard yesterday.  Funnily enough I was relistening to his Reith lectures the other week.  I'm a particular fan of the idea that we don't always want to be consumers, we do actually want to be citizens as well.

His idea that we are now living in a market society, not just a market economy, is particularly pertinent these days, especially when it comes to issues like trust that I have blogged about before.  Valuing things only when they have a price tag attached does not reflect the values that we all have.  CEO salaries no longer reflect the value that they bring to the job.  Price no longer tells us something about the real value of an item, all it tells us is how the 'item' wants to be valued.  

Pay as You Throw?

I know it's really geeky to take photos of bins while I'm on holiday but I can admit to doing this occasionally because I know for a fact that I am not the only one!

So for all you bin geeks out there, check this out. Below ground storage in Ljubljana town centre. Swipe card for residual and Organics. Free to open for dry recycling. Am assuming this means that if you don't pay for your residual at the moment, you soonwill.

Facebook Friends and Trust

I know I keep banging on about trust at the moment, but Facebook has shown us recently why people are losing faith in the idea of a free market.

When Facebook shares were floated, they were bought by small investors and fans of Facebook at $38 a share.  It wasn't only small investors, George Soros bought some too.  However last week saw the end of the 'local-in' period for the early investors, such as Goldman Sachs.  As they rushed to cash in their gains, Facebook's share price fell to less than half of what we were originally told it was worth.  Told by people like Goldman Sachs.

It doesn't matter if this was rigged or not.  It's a high profile float where those who were on the inside make lots of money, and those who take their advice and listen to the hype, don't.  At least in the short term.  I personally have an issue with free marketeers who say that capitalism is the only answer.  It may be, I don't know, but the market isn't free and we shouldn't pretend otherwise.

Transparency and the Electricity Market

A belated comment about electricity markets, which I suddenly realised when I was reading the FT magazine recently.  Tim Harford wrote a piece in the Undercover Economist called 'Don't Judge a Book By Its Cover Price'.  The article was about amazon and computer pricing models, but he mentioned the problems of price transparency.

As JLF Bertrand pointed out in the nineteenth century, is two companies are offering an identical product and have transparent pricing, then rational customers will just go to the one that is the cheapest. This will lead to a race to the bottom in terms of pricing, until the price is at, or just above the cost of production.  This surely highlights a reason why electricity pricing is far from transparent.  The more complicated each company makes its products, the harder it is for customers to compare, and then move to the competition.

Bertrand's argument was too simple, however.  While a cartel would be illegal, imagine if the competing companies understand this model and find a way to raise prices between themselves, or just never start the price competition in the first place.  In fact, it would be entirely irrational to start undercutting your competitor, as you know where it ends - zero profit for everyone.

Which makes me wonder which way electricity prices are heading.