Energy, Competition and Pretence

One of the most important challenges of management in the real world is how they can make their businesses truly competitive. Competition drives firms to be efficient and effective and to invest in technological innovation to provide improved ways of satisfying customer needs and wants. Such progress depends on the continuing ability to make sufficient profit to ensure survival in the short term and to invest for greater success in the long term. That is what real business is about.

Economists, such as Michael Porter, influenced generations of the leaders of finance, industry, the media, academia and politics, with their theories of competitive strategy, which were based on the not very profound equation that sales revenue minus cost equals profit. Therefore the way to maximise profit – which, for these theorists, is the whole purpose of business – is to have the lowest costs or highest prices.

The way to achieve the lowest costs is to have the biggest sales volume and therefore the greatest economies of scale. The way to achieve the highest prices is to make the product different in some way for which customers were prepared to the highest premium. So long as these processes are not interfered with by government regulators, then, according to the theory, the rules of perfect competition will apply and the consumer will be the ultimate beneficiary.

How does all this apply to the energy supply market?

Can the ‘big six’ suppliers make their products different in some way for which customers are prepared to pay a premium price? Well, electricity is electricity and gas is gas, so the end product is absolutely standard. Also it has to be delivered to the customer by fixed means, through pipes or down wires to the individual household. The only intrinsic means of differentiating the product is by the mode of its production. Some customers might be prepared to pay more for renewable energy. But unless there was a duplicate means of delivery to households, renewable is necessarily mixed with non-renewable before delivery. At present, therefore, the product is a non-differentiated commodity.

So, can the ‘big six’ suppliers compete with each other on the costs of energy production and delivery? That is simply not possible, since the suppliers don’t actually produce and deliver energy themselves. And where the producers are associated ‘big six’ companies, they supply into the national grid rather than to end-users. They are sometimes identified as energy wholesalers but, apart from the two Scottish suppliers, even this is an overstatement of their actual operation. The roles they perform, which could in any way be competitive, are to monitor quantities delivered and to invoice accordingly. This is not so much a business as a back office operation. Apart from providing minor ancillary services, the only way they can make more money is by alternative ways of charging customers for bog standard energy and persuading them to pay more than they need. Hence the many different and complicated tariffs on offer aimed at maximising profits for the supplying company.

Energy supply has not worked as the free market ideology intended. The argument was for government to get out of the economy as far as possible, and in the case of energy to establish a competitive market. But the ideologically driven attempt to create an artificially competitive market is self-defeating. It needs the external regulation, which the ideology prohibits, in order to create and defend competitive activity. So genuine competition remains a million miles away and any assertion of its existence is just pretence.

The ‘big six’ supply over 90% of the market, and their closely related price adjustments suggest they operate, more or less, as a de facto cartel. Examples of their abuse have figured from time to time on this blog (eg https://gordonpearson.co.uk/2013/03/ and https://gordonpearson.co.uk/2013/10/18/). Monopolistic or cartelised market abuse continues, simply because the abusers can.

The question remains, is energy competition a known and understood pretence, to cover the deliberate abuse of consumers? The subject has been raised in current general election related discussions, but a definitive answer has proved elusive, no matter that it is so obvious.

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