Dr Giulietti reveals wholesale energy market issues on Sky
31 October 2013
Dr Monica Giulietti told Sky News it is difficult to truly know how much energy wholesale costs have risen because these prices are not revealed publicly.
The Warwick Business School Associate Professor of Global Energy has been studying the UK energy market for more than 15 years and says the only information available is based on assessments through financial information companies such as ICIS Heren and Platts.
Dr Giulietti was talking on Sky News’ Jeff Randall Live after senior executives from the ‘big six’ energy firms told the Government’s Energy and Climate Change Committee that rising wholesale costs and environmental taxes were behind the latest average 9.1 per cent hike in electricity and gas prices for consumers.
Though Stephen Fitzpatrick, director of small energy firm Ovo, told the politicians he was buying gas at seven per cent less than it was two years ago.
“The wholesale market is an area of contention,” said Dr Giulietti. “There is an element of truth in what the ‘big six’ are saying. Energy price increases have been observed in the UK starting from 2004 when the country became a net energy importer and costs went up. In addition, the recent interventions in the market by the Government, to deliver environmental and social policy objectives, have contributed to the costs which make up our energy bills.
“However, there is a strong element of uncertainty about how the energy suppliers’ costs are calculated. That is the big issue, how to estimate what the wholesale price is. In the absence of a well-functioning wholesale market which gives correct price signals we cannot tell whether the suppliers’ profits are fair.
“There is a large component of the market which is based on bilateral contracts. As these contracts are commercially sensitive, the agreed prices are not revealed. One of the reasons why the UK energy regulator has been unable to reliably estimate the wholesale cost is associated with the fact that there is a time structure to the future contracts so the energy suppliers have been buying energy for future delivery with different time horizons. This makes it difficult to establish what generates the wholesale cost as the structure of these future contracts is not known publicly.
“Furthermore there is no clear price signal emerging from these markets and even transactions in international trading hubs have raised concerns about the possibility that prices might be manipulated."
Energy secretary Ed Davey has announced plans for a yearly review of the energy sector focusing on competition, profit and customer engagement following accusations the energy market is failing.
"This market has been the subject of several investigations starting with the Energy Supply Probe in 2008 and although problems of tariff complexity and lack of transparency have been identified no evidence of anti-competitive behaviour has been discovered yet," said Dr Giulietti.
“The perception is that the attempt to engage the consumers in the market has failed. The multiplication of tariffs has been a massive problem for people who were determined to find the best deal, but discovered it is very difficult to identify the best one for them. Consumers still seem to perceive the switching process as complicated and time consuming, so their actions have not brought about the competition that was hoped for when the liberalisation process started in the mid-1990s.
“We have had 15 years of attempting to generate competition through switching but all the evidence is that there is a lot of consumer loyalty and reluctance to switch.”
Listen to Dr Monica Giulietti being interviewed on Radio Five Live here. She is on after 1hr 43mins.
Dr Monica Giulietti teaches Business, Policy & Regulation in the GEI and Economics of the Business Environment on the Warwick Global Energy MBA.