26 January 2017
Service with a Shock
The future of the electricity supply
by J.R.Thomas
Who would want to run an electricity supply company in these times? More and more choice for the consumer, with all sorts of potential supply, including pumping heat from under back gardens or powering freezers from mini windmills on the roof. Vicious competition in an industry that was, until a generation and a half ago, a state owned and run monopoly. Stirred in with a level of popularity that puts electricity companies on a par with traffic wardens and tax inspectors, and only slightly higher than bankers, one almost starts to feel sorry for the electro-executive in his comfortably warm office.
Electricity is of course (adjusted for inflation) much cheaper than it was a quarter century ago. But consumer memories are short and expectations of pricing and service are high, stoked by the endless fire of the media which seems to have it in for the supply end of the business.
Although prices have been lower for a long time, with some fluctuations when the oil price rose to well over US$100 a barrel a couple of years ago, the recent direction of costs is generally up. Much of Britain’s electricity still comes from carbon based sources; traditionally of course coal, but increasingly, in the latter part of the twentieth century, gas (oil fired power stations are rare; gas is the main provider and of that, more than 60% comes from UK controlled gas fields, most of them under the sea). Coal has almost entirely vanished as a source of power generation; there are nine remaining coal powered plants, of which three are about to be converted to biomass firing; all the rest will be closed, the government intends, by 2025. But, even now, they are mostly on standby, for those winter peaks and just to make sure Britain has enough reserves to cope with economic growth – especially in manufacturing, which, not surprisingly, uses more electricity than, say, financial services.
The other generator of electricity is of course….no, not green sources, not yet, but nuclear power. That too is running down fast as the great nuclear power stations built in the 1950’s and 1960’s come to the end of their lives, though Hinckley Point when it gets built (one is still tempted to say “if”) will to an extent reverse that trend. There are also proposals to build or rebuild some of the smaller stations, though that will no doubt cause furious arguments and debate, so don’t expect anything to happen too qiuickly. Nuclear power from old financially depreciated plant is quite cheap, though, expressed like that, possibly not too reassuring to anybody who lives down wind of one.
The growing contributor to our electricity grid is of course green energy, or renewables. Those landscape desecrating turbines are the biggest, but also the most expensive and least reliable, contributor to the green mix, but the real growth is from solar panels; those glinting fields coyly hidden behind hedges on south facing slopes are indeed agriculture’s new earners. But also significant are the solar panels that householders are putting on their house or shed roofs, which, if large enough and facing the right way, can not only power the house underneath but also feed into the national grid.
And also under this heading we have bio-energy whichdoes not just mean burning crops grown for the purpose – willow and eucalyptus in particular (at least those power stations must smell nice), but also household and small factory wood chipping and straw plants, methane from rubbish dumps and – yuk – sewage plants.
Hydro-electric power, very in vogue in the 1960’s has not advanced since then, partly of course due to the lack of energy in British rivers, but also because the most powerful water courses tend to be in areas of outstanding landscape beauty. New schemes for coastal and river barrages may make it a growth sector – but not yet.
So, the consumer must be thinking, what is the problem? Lots of different sources of power, and healthy competition among generators, surely. The problem is that the cheapest forms of power are the ones that we are making less and less use of, for environmental reasons, and that clean green power is expensive. Although technology is heavily reducing the cost of solar panels, for instance, the research costs for renewable energy are loaded by the government by special tariffs on to the electricity companies. They pass this on to consumers and so it ends up on your quarterly bill. This surcharge accounts for getting on for 8% of household bills and it will go up even more as green energy grows. It does mean that Britain’s carbon footprint has diminished more quickly than almost any other nation (feel that warm glow), but the cost is in your bill – and your employer’s if your employer happens to be a steelworks or car plant.
But don’t expect your electricity bill to just go up 8% this year. Although our carbon stations are mostly gas fired, the gas price moves with the oil price – and reading the Shaw Sheet business pages you will be aware that oil has doubled in price from its low point eighteen months ago. The power supply companies are forecasting that their costs will be up 15% this year – not surprising with gas prices to wholesale users up 44% in 2016 – and they would like the consumer to bear most of that. That is not just because their executives have mortgages and school fees to deal with, but because power companies are heavily regulated and their profits are not that great to start with, although they are admittedly low risk businesses with investors willing to accept relatively low returns in return for reliable performance.
That means controlling costs and operating efficiently. Some are better at that than others. Npower is the supplier everybody loves to hate; it is famous for the number of customer complaints it generates and features regularly in financial problem pages for its inability to (supposedly) get anything right or fix anything that goes wrong. But Npower is also the cheapest supplier in most league tables; its margins are narrower than most of its competitors so its service is also minimalist – although it seems not to have got that message across to its customers.
So what is the outlook for your household budget for the next few years? In the short term, not good – carbon generated power will cost more, and the costs of investing in green energy will go on increasing, with a nice kick from Hinckley Point subsidies to EDF (its operator) when (if) it comes on line. But maybe in the longer term, not too bad. We are getting much more efficient in the way we use electricity – insulation in new homes and old is greatly improving and a Cat 5 modern house will need no heating (or cooling) except in extreme weather. Not that there are many of those, but, as the housing stock is renewed, its energy usage will reduce. Your electric oven uses much less than power than your old model did, and so does the office air conditioning, helped by triple glazing and solar powered window systems. On the production side, green energy often has high capital costs but they will depreciate over time, and new technology is reducing green energy production costs – and reducing distribution costs as consumers’ roofs become little power stations. Plus, whisper it, the UK’s fracking revolution, now moving into production, if very controversially, should extend our carbon power sources for a good long time yet.
All this is not just a UK phenomenon either; solar and wind and hydro production is increasing all over the world, fracking is on the march, and the upshot of this competition is likely to be that oil and gas prices are going to tend to trend downwards – maybe not this year, but in the longer term. Still, best for the prudent householder to put on a sweater for the winter – but soon because he wants to save the planet, rather than because he cannot pay his power bill.
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