Power Grid
We are going to look at how the fluctuating costs of wholesale gas has affected the consumer costs in the UK. The fluctuations in the cost of coal will not be examined because it is challenging to access the raw data, which is hidden behind a paywall at globalCOAL. The analysis will switch between three different energy companies: British Gas, Scottish & Southern Energy, and Scottish Power. The Big Six Energy Companies usually follow each other when it comes to increasing or decreasing consumer costs so this shouldn’t be a massive problem.
We will start by examining the changes in the cost of a unit of gas and electricity to consumers between 2004 and 2011. The price change data for British Gas, one of the Big Six, was taken from here. If an arbitrary cost to the consumer of 10 pence per unit of electricity and gas is chosen as a starting point then we can see a 130% increase in the cost of gas and 90% increase in the cost of electricity to consumers over last seven years.
If the cost of raw materials really is the largest contributor to operating costs then the wholesale cost of natural gas between 2004 and 2011 needs to be examined. The cost of gas peaked towards the end of 2005 and during 2008, which co-occurs with increases in the cost of gas to consumers. However, if we cross-reference the fall of the wholesale cost of gas in 2009 with the fall in consumer costs in 2009, we can see a discrepancy: wholesale costs dropped approximately 300% but consumer costs dropped 20%. This is assuming that energy companies buy natural gas at the same cost, which may not be the case.
The pre-tax profits of Scottish & Southern Energy, another of the Big Six, increased by almost 30% in 2008, when the cost of gas peaked and their profits have remained at a high level. Could this be because of the substantial decrease in wholesale cost against an almost identical cost to the consumer?
Raymond Jack, Scottish Power’s UK retail director, said on 7th June 2011:
“Wholesale prices for gas and electricity have increased significantly since the end of last year, and continuing unrest in global energy markets means future prices are volatile. We understand times are difficult for many people, and we have done what we can to absorb these additional costs for as long as possible to minimise the impact on our customers.
“The rising burden of non-energy costs faced by Britain’s energy suppliers – including the cost of meeting government environmental and social programmes and the cost of distributing electricity on the national grid – has also placed further upward pressure on energy bills.”
The emphasis is mine. We have already shown that energy companies were continuing to charge consumers at a price point that allowed them to make a profit when natural gas was at its peak but have wholesale costs really increased significantly since the end of 2010? Strictly speaking, the increase in costs since December 2010 is $0.50 per mBtu but energy companies were still charging consumers when the cost of gas was at its peak and the cost of wholesale gas is currently less than it was in January 2004.
What else might be causing the upward pressure on energy bills? It doesn’t seem like the cost of raw materials is driving up the consumer costs, it’s the desire to pay above inflation dividends to shareholders. The Chief Executive of Scottish & Southern Energy recently said:
“Our entire investment program is designed to give that continuing momentum to dividend beyond 2013,”
The utility, which has paid shareholders an above-inflation dividend payment every year for the last 12, committed to paying a full-year dividend of at least 2 percent more than inflation in fiscal year 2012 and 2013. Revenue from new customers and generation projects due to come online this year and next will underpin dividend payouts, Chief Executive Ian Marchant said on a conference call today.
In summary, we have found that energy companies increased consumer costs during the peaks of 2005 and 2008 to cope with the increased cost of wholesale natural gas. However, the subsequent and sustained drop in wholesale costs since 2009 has not been passed onto consumers, which has resulted in record and sustained profits for the energy companies for the previous three financial years. The energy companies are now increasing consumer costs from a baseline designed to deliver profits when wholesale costs were almost 300% higher than they are today.
