First it was Ed Milliband wanting to impose an energy price freeze, now John Major has gone even further banging on about a windfall tax. What are these guys on?
Major seems to think the energy suppliers are profiteering - taking exceptional rents. Now, hang on a minute, John. These companies are operating in a market for a couple of undifferentiated products (electricity and gas). The former essentially has its price set by world-traded raw materials and conversion costs and the latter is itself a world traded commodity. So we should not be shocked to see that their offers are very similar. These firms are not going to compete like mad on price - loosing customers hurts the bottom line because they would have to spread their fixed costs over a smaller customer base; and winning customers is expensive. Sure, there's a little jockeying around the edges but they ain't going to rock the boat too hard.
It's true that the barriers to entry into the market are high so, surprise, surprise, we have just 6 major companies operating in this country. This is about the norm for this sort of market. Could they be colluding and taking super-rents? Well, just possibly - price signals are easy to make in this market - but sooner or later someone would break ranks and I think we'd settle back to their returns hitting their cost of capital. And if there is mischief it's not for someone to impose a windfall tax without assembling the evidence. What are the competition authorities for? (And eventually the courts?).
The real shame of all this posturing is the potential for investors to run a mile. Britain is in dire need of new plant and other infrastructure. The sight of governmental meddling is just what shareholders do not want.
This issue is too important for populist grandstanding - our politicians should be big enough to get off their soap boxes and provide the right environment for sustained investment.
Friday, 25 October 2013
Saturday, 12 October 2013
What is Ed Miliband Smoking?
So Grommit wants to freeze gas and electricity prices for a couple of years. Good election gambit that.
But he also wants to have a carbon free grid by 2030.
Is he going to do this with more or less the same power market as we have now? 'Cos if he is his first pledge will stifle investment while his second demands it.
Or perhaps the good old CEGB (my old stamping ground) is on its way back. Now there's a thought.
But he also wants to have a carbon free grid by 2030.
Is he going to do this with more or less the same power market as we have now? 'Cos if he is his first pledge will stifle investment while his second demands it.
Or perhaps the good old CEGB (my old stamping ground) is on its way back. Now there's a thought.
Fracking - the Need to Remove Emotion
I've muttered in this blog on previous occasions about the need to approach the fracking "debate" in an informed and rational manner. Unfortunately that is still not happening, the debate remains a battle of the megaphones.
On the one hand we have the likes of David Cameron who argues that fracked gas will drive down energy bills and make Britain more competitive. This has happened in the States but there are plenty of differences between the situation here and the scene over there. Translating market experience from the latter to the former is certainly not a one-to-one process.
On the other side are the environmental movements who say that fracking poisons water supplies, pollutes the atmosphere and triggers earthquakes. Much of this is vastly overstated.
Let's try to place a little bit if rationality into the arena.
First of all, how about a little piece of history? Fracking as a technique has been around since the 1940s. Essentially it consists of pumping a fluid into a shale formation (shale in the most abundant form of sedimentary rock and serves as the source rock for oil and gas) to crack the rock. These fractures are propped open with a proppant, often sand, to allow trapped oil and gas to flow out. Water is the major component of fracking fluid but there are chemical additives to ease the process (e.g. polymers to reduce friction thereby allowing lower pressures to be utilised).
The big change that led us to the current situation was the application of fracking combined with horizontal drilling to tap into gas-rich shales that had hitherto been impossible to extract economically. In 2000 shale gas represented just 2% of US natural gas production. Now it is approaching 40%.
So what of the competing claims of the megaphone wielders?
Let's start with the economics. Latest estimates suggest that there are about 1300tn cubic feet of shale gas in NW England. That's a hell of a lot and even extracting just a low percentage would cover potential demand for many years. However, England is much more densly populated than the US; land ownership and mineral rights differ markedly; despite the current fuss over enegy prices the population here appears to have a greater tolerance for high costs particularly where they are incurred for environmental reasons; the regulatory regime here is likely to be and remain more stringent that on the other side of the Atlantic (see the latest EU moves on requiring extensive environmental audits before fracking for instance). So an economic bonanza seems unlikely. Sorry, David.
However, fracking would play to energy security which readers of this blog will recognise as a recurrent theme. And with the US now exporting cheap coal that has been displaced by gas there is a delicate balance to be managed by the UK and other European countries between climate change commitments and international competitiveness.
Now to the environmentalist's side.
Can groundwater be contaminated? Well, yes, in certain circumstances it can. But in general shales for fracking and groundwater aquifers are separated by thousands of metres of rock. The issue would appear to be one that is manageable through judicious well construction. So there is a place for regulation and inspection here - adding to my "no economic bonanza" statements above.
Does fracking trigger earthquakes? Very rarely and of low energy. Coal mining is a bigger threat in this area. However, storage of wastewater in depleted wells has been shown to cause more noticeable tremors. In fact waste water is perhaps one of the bigger problems. We may well see much more recycling and less disposal in the future.
Finally there's climate change. Gas is a carbon-based fuel, of course, so there is a CO2 issue. If attention is deflected from low/zero carbon energy sources by fracked gas then this is not a good thing - especially if the gas is used in electricity generation because a CCGT built now could still be operating in 2040. But if gas is displacing coal then at least it is a move in the right direction.
What do I think is going to happen? Well - there will be shale gas, the politics of the situation simply dictate that. Possibly, though, it will be in support of renewables, not replacing them. And, who knows, maybe carbon capture and storage will have a role to play.
Watch this space.
On the one hand we have the likes of David Cameron who argues that fracked gas will drive down energy bills and make Britain more competitive. This has happened in the States but there are plenty of differences between the situation here and the scene over there. Translating market experience from the latter to the former is certainly not a one-to-one process.
On the other side are the environmental movements who say that fracking poisons water supplies, pollutes the atmosphere and triggers earthquakes. Much of this is vastly overstated.
Let's try to place a little bit if rationality into the arena.
First of all, how about a little piece of history? Fracking as a technique has been around since the 1940s. Essentially it consists of pumping a fluid into a shale formation (shale in the most abundant form of sedimentary rock and serves as the source rock for oil and gas) to crack the rock. These fractures are propped open with a proppant, often sand, to allow trapped oil and gas to flow out. Water is the major component of fracking fluid but there are chemical additives to ease the process (e.g. polymers to reduce friction thereby allowing lower pressures to be utilised).
The big change that led us to the current situation was the application of fracking combined with horizontal drilling to tap into gas-rich shales that had hitherto been impossible to extract economically. In 2000 shale gas represented just 2% of US natural gas production. Now it is approaching 40%.
So what of the competing claims of the megaphone wielders?
Let's start with the economics. Latest estimates suggest that there are about 1300tn cubic feet of shale gas in NW England. That's a hell of a lot and even extracting just a low percentage would cover potential demand for many years. However, England is much more densly populated than the US; land ownership and mineral rights differ markedly; despite the current fuss over enegy prices the population here appears to have a greater tolerance for high costs particularly where they are incurred for environmental reasons; the regulatory regime here is likely to be and remain more stringent that on the other side of the Atlantic (see the latest EU moves on requiring extensive environmental audits before fracking for instance). So an economic bonanza seems unlikely. Sorry, David.
However, fracking would play to energy security which readers of this blog will recognise as a recurrent theme. And with the US now exporting cheap coal that has been displaced by gas there is a delicate balance to be managed by the UK and other European countries between climate change commitments and international competitiveness.
Now to the environmentalist's side.
Can groundwater be contaminated? Well, yes, in certain circumstances it can. But in general shales for fracking and groundwater aquifers are separated by thousands of metres of rock. The issue would appear to be one that is manageable through judicious well construction. So there is a place for regulation and inspection here - adding to my "no economic bonanza" statements above.
Does fracking trigger earthquakes? Very rarely and of low energy. Coal mining is a bigger threat in this area. However, storage of wastewater in depleted wells has been shown to cause more noticeable tremors. In fact waste water is perhaps one of the bigger problems. We may well see much more recycling and less disposal in the future.
Finally there's climate change. Gas is a carbon-based fuel, of course, so there is a CO2 issue. If attention is deflected from low/zero carbon energy sources by fracked gas then this is not a good thing - especially if the gas is used in electricity generation because a CCGT built now could still be operating in 2040. But if gas is displacing coal then at least it is a move in the right direction.
What do I think is going to happen? Well - there will be shale gas, the politics of the situation simply dictate that. Possibly, though, it will be in support of renewables, not replacing them. And, who knows, maybe carbon capture and storage will have a role to play.
Watch this space.
Friday, 11 October 2013
Price Rises, Weasel Words and Green "Taxes"
So SSE was the first one to blink an announce energy price rises of about 8.2%. And guess what? They implicated "green taxes" stating that they had risen by 13% whereas wholesale energy costs have risen by a mere 4%.
But hang on. This is the usual percentage vs absolute con.
Information from DECC shows that the breakdown of the average £1267 dual-fuel energy bill is
Wholesale energy £597
Network costs £257
Other supplier costs and margin £240
VAT £60
Green and social policies £112.
So what is 4% of £597? Yup, it's £24.
And what's 13% of £112. Well, it's £15.
So, yes, there is an uplift from green and social policy costs and levies but in absolute terms it is still less than the uplift from wholesale price movements.
Note that I used the term "green and social policy costs" 'cos that's what they are. ECO and the Warm Home Discount, for instance, are not about low carbon generation, they are about keeping the poor and the old a tad warmer in the winter.
So, whatever happens you will be paying more for your energy. The question is, do you want to spend that money on low carbon sources or fossil fuels; and how much should you be covering social costs? Just don't take energy company froth at face value.
But hang on. This is the usual percentage vs absolute con.
Information from DECC shows that the breakdown of the average £1267 dual-fuel energy bill is
Wholesale energy £597
Network costs £257
Other supplier costs and margin £240
VAT £60
Green and social policies £112.
So what is 4% of £597? Yup, it's £24.
And what's 13% of £112. Well, it's £15.
So, yes, there is an uplift from green and social policy costs and levies but in absolute terms it is still less than the uplift from wholesale price movements.
Note that I used the term "green and social policy costs" 'cos that's what they are. ECO and the Warm Home Discount, for instance, are not about low carbon generation, they are about keeping the poor and the old a tad warmer in the winter.
So, whatever happens you will be paying more for your energy. The question is, do you want to spend that money on low carbon sources or fossil fuels; and how much should you be covering social costs? Just don't take energy company froth at face value.
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