The bias of Ofgem towards companies by insisting that energy be sold at the marginal cost of the highest cost producer has been a long-running theme on this blog and is discussed in Surviving 2023.
It is nice to see that the policy, and its cost, has finally caused a resignation in revulsion at its imposition on a vulnerable population.
That’s not what the resignation was about, at all. Nothing to do with selling at marginal cost. It’s “How long do the energy companies have to wait before they can charge consumers for hedging costs?”
Blimey, now he’s claiming credit for things he’s actually getting wrong.
I’m not sure I understand Ofgem’s logic. Shouldn’t all the unicorn firms that were gonna go bust have done so by now? Are they thinking Scottish Power and Octopus are in danger?
Having a price cap was a bad idea in the first place tho, one of many self-harming decisions the likes of James Delingpole have been warning about for the past decade. Thanks, ‘conservatives’!
This, from the cringeworthy ‘Surviving 2023’ is one of the most hilarious things I have read yet from him. Forget Brexit – let’s go full on Libya under Colonel Qaddafi or Venezuela under Hugo Chavez:
in doing its job Ofgem harms consumers. For example, although 50% of gas used in the UK is still home produced, Ofgem lets energy companies price gas as if it is all bought on the international market, where prices have risen, enormously. But what that means is that UK gas producers are making excess profits because none of their costs have really risen as a result and all the increased price does is inflate their profits.
How does this guy even tie his shoes in the morning?
Van Patten
I’m not educated in these matters so I’m asking (genuinely) for a bit of education…
My guess is that Murphy’s argument assumes that the home production is only for home consumption and stands apart from the wider world. But the reality is that the production is of gas to be sold wherever…so if those evil foreign buggers want to pay more then the gas would be sold to them unless the home folks match them.
Something like that?
Economics insists upon something called “opportunity costs”. If we do this thing here, then we can’t do that thing over there with the same stuff. So, not being able to do that over there is a loss to us, it’s a cost of doing this thing over here.
If we could sell the gas for £100 to Frogs but decide instead to use it at home for £10 then that’s a £90 loss against what we could have. That’s true whether it’s profits to capitalists, higher wages to gas drillers or just higher taxes on gas exported. Not selling at the highest price is a loss.
And then compare that loss with the loss we suffer if, as a result of no gas being available, we allowed the lights to go out (or people to go cold). The wider value assessment of opportunity costs is not simply monetary.
Geoffers
No worries – Tim has rather beaten me to it. But what Murphy is proposing is something that has been tried by various regimes with all manner of commodities. What he is advocating is a huge subsidy on gas. If gas producers are forced to sell at below cost price they’ll either stop producing it or someone will have to subsidise that. Murphy seems to indicate is that OFGEM (or the state in whatever form) should simply instruct the producers to sell at a discounted price, presumably under the threat of menaces – its a tried and tested strategy from countries like Venezuela and Zimbabwe or Equatorial Guinea –
You can Google the results of it of course on the wider economy in those countries. In short, he doesn’t understand Markets of any kind, and certainly not commodities.
OK. I do get that. But in one sense Murphy is correct – operating costs haven’t changed.
Circumstances have dictated that foreign buggers will pay more, so we get to coin in from the home market as well to cover the opportunity costs. But opportunity costs don’t hit the books, so we pocket increased margins in our records and shareholder value. N’est pas?
Isn’t that what is being objected to? So what’s the counter?
Again, not being snarky. Genuinely want to understand.
If you tell commodity producers that any time prices rise then you’ll confiscate their profits then commodity producers will stop taking the risk to develop those fields. Because sometimes they lose money too – and Spud’s not recommending subsidy for that, is he? Most US fracked gas producers were losing money the past few years for example. But America did get cheap gas….
“If you tell commodity producers that any time prices rise then you’ll confiscate their profits”
But (and I know the politician’s appetite to set precedents so maybe answering my own question), the argument isn’t for “any time prices rise” – it’s that this is an extreme situation calling for an extreme measure.
Politicians are untrustworthy gits so shouldn’t be granted a precedent, but beyond that…?
“ And then compare that loss with the loss we suffer if, as a result of no gas being available, we allowed the lights to go out (or people to go cold). The wider value assessment of opportunity costs is not simply monetary.”
But if we don’t allow the price to rise marginal supplies won’t be brought in to production so we could still run out. And if the price doesn’t rise to the end consumer they lose the incentive to reduce demand.
That’s not to say I’m not sympathetic towards your point, but subside people not goods. I can afford those cost increases, I don’t want to pay more and we’re already looking at how we can reduce our consumption, why should we bother f the price doesn’t rise?
Geoffers
It’s an interesting point, and I see where you are coming from. My counter would be twofold:
– During lockdown marginal costs increased enormously and no one suggested these firms get a bailout (unlike the public sector which in some cases is still not back at work two years on) – so what kind of message does it send if we tax ‘windfall’ profits while failing to support the producers of energy when circumstance are hard
– The problems of excessive energy costs are not caused by the energy industry – they are caused by idiotic environmentalists and people like Murphy who have swallowed a myth around Climate Change and have taken concrete steps to reduce reliable energy supply sources in favour of those which don’t work. Therefore I’d say excess charges need to be levied on environmentalist ‘charities’ and terrorist groups, as well as people like Murphy before we go after the Energy companies.
“operating costs haven’t changed.”
Er yes they have. The price of everything that a company uses has gone up. Materials, services, labour costs, input prices, everything has gone up, so the cost of getting the gas out of the ground and into people’s houses has gone up. Maybe not as much as the price of gas has, but costs definitely have risen.
As a farmer I’m actually rather similar to UK based gas producers – we produce an internationally traded (and priced in dollars) product, but our operating costs are UK and sterling based. So while the world price for my wheat production has indeed gone up significantly (nearly doubled from trough to peak, though less now) my input prices have also gone up a lot too. Fertiliser has tripled, diesel more than doubled, agro-chemicals have doubled, labour costs have risen, spare parts are more expensive, contracting costs are up, machinery prices have also risen.
So if you think I’m going to sell grain at 2021 prices while paying 2022 costs you can sod right off.