Britain's big six energy companies will face fines unless they open up the electricity market to competition from smaller rivals, under proposals by the regulator designed to "break the stranglehold" of the biggest suppliers. (DTel)The details of this are less dramatic than one might imagine: they intend to 'force' the biggest 8 generators (not just the 'Big 6') to become market makers in the forward market out to 2 years. Since liquidity in the 2-year energy forwards is pretty unsatisfactory - and since that, in turn, is pretty damaging - no one can be happy with the status quo. Ofgem have been farting around worrying aimlessly about energy liquidity for 8 years now and the only positive development has been the advent of hedge fund and PE money since around 2006 - mostly in the gas sector because electricity trading is fiendishly difficult. On the downside, banks have been progressively scaling back their commodities trading altogether.
Of course, the real issue is that in the '00s, Ofgem and the competition authorities (against their better judgement but under instruction from Gordon Brown) allowed dumb vertical integration to take hold once more in the electricity market, after the successful efforts of 15 years to break it up. EDF being allowed to buy BE was the final straw in the structural undermining of liquidity, a point I made at the time. The European authorities, who ought to be a back-stop against this kind of thing, were equally supine.
What I don't understand is why anyone thinks small, under-capitalised electricity suppliers have a God-given right to thrive. This is the most capital-intensive of industries - whether or not a player intends to back ts energy positions with physical assets (power plants, gas production or storage facilities etc). Even if they intend to operate on a 'merchant' model - just buying wholesale to meet retail demand - huge quantities of risk capital are required to back the big, long-term deals that are required for that business model. That is the lesson of 'asset-lite' Enron: it's a game for big boys with a credit rating of at least A, preferably higher.
What's needed is real competition between ten or so properly-capitalised players. Boutique energy marketing outfits with no credit won't be able to transact 2-year hedges anyway - unless the new 'rules' force the Big 8 to take the credit risk, the merest featherbedding. Along with the free ride that is currently given to windfarms in terms of not being charged the full cost of their intermittency, plus a heap of social obligations as regards 'poor' retail customers, and even more nonsense contained in the Energy Bill, the burdens being heaped on the big players will one day make some of them decide it's not worth the candle. Obvious candidates for giving up in disgust are cash-strapped RWE of Germany (nPower) and Spanish Ibderdrola (Scottish Power). It's not too much of a stretch to see E.ON having second thoughts as well.
See how we like it when Big 6 becomes Big 3, eh? No amount of flaky, subsidised suppliers called 'Nice Clean Energy' or 'Friendly Power' will help us then.
This post first appeared on the Capitalists@Work blog
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