Blog Archive -October 2013

20th October 2013
A couple of points on the energy debate. The first to note is that the gas and energy market is one where a near monopoly has been built and this was recognised with creation of a regulator when the industry was privatised. To listen to some of the cries of anguish there is clearly a misunderstanding of the motivations of a market and a re-examination is required. To many this is summed up by a market stall with the stall holder haggling over the price and if the customer does not like the price they go off to another stall. This analogy works when both parties are equal but if one has greater need than the other then it starts to fail as an arbitrator and the benefit goes to the stronger of the two parties, thus in a monopoly it is the supplier who dictates the price and in a time of surplus it will be the customer. Thus the commonly held view that many suppliers will naturally lead to competition but this is not always the case. With profits as a driver, competition benefits the consumer when suppliers can gain market share which is usually the case for a new product and service with lot of small players. Once there has been consolidation it becomes more difficult to grow by discounting and profits can only grow with price increases. So provided suppliers are happy with their share of the market they can push up prices knowing that their competitors are likeminded. The situation is further complicated by anti-monopoly rules that determine maximum market share a company can have which may stop one firm becoming dominant but not the consequences. This is the situation with the energy markets. With all companies trying to maximise price it is unlikely that real competition will return by itself even with a smaller companies entering the fray. Thus the need for the regulator but there could be an alternative. If a new entrant were to have a reason for growing market share other than profit then the whole dynamic of the market changes. Such a new entrant could be a government backed company with a remit to sell energy at a cost plus basis or a minimum market share such as that for the BBC in television.
The second relates to the debate about future investment. When the industry was privatised it had redundant capacity of over 25% but now we are told that it is down to less than 2% with the potential for the lights going out in the winter of 2015. Clearly the protestations about money required for investment ring a little hollow when the industry has allowed the spare capacity to be run down with little thought for the future. Rather than talking about future investment they should already have it in place. but with no effective competition the energy companies will make their profits regardless of blackouts.