Why was SSE rude about the Miliband plan two weeks ago and then show today just how feasible it is?

(28.10.13 This article contains an assertion that the electricity companies were not telling the whole truth when they blamed rising wholesale prices for the need to increase their UK retail prices. A report in the Financial Times today, based on Ofcom data, makes a similar point. http://www.ft.com/cms/s/0/8c375508-3d67-11e3-b754-00144feab7de.html#axzz2j159tMhl (Paywall).  There are two curious features of the price rises announced by SSE (‘Scottish and Southern) today. First, they offer all customers a 24 month fixed tariff at the same price as their standard variable plan. So they’re doing exactly what Ed Miliband suggested, even though they dismissed this idea as ‘unsustainable’ only a few days ago. Second, they justify their price rise by reference to rising wholesale energy prices. This is particularly strange since prices for future delivery of electricity are no higher than 2012 levels, at least according to figures from Drax, the largest independent producer in the UK.

Two year fixed

The two year fixed deal is being pushed by SSE. Here’s how it sells the product on its web site this afternoon

Wouldn't it be nice to have energy prices that won't go up? That's exactly what you get with our 2 Year Fixed Price Plan#. Sign up and fix your energy prices for two years at the same prices as our standard energy rates effective from 15 November 2013, and there's no charge to fix.

So alongside its standard variable tariff it is offering a product that wholly corresponds to Labour’s proposal. In fact it is a fixed price for 24 months, not the 20 months put forward by Miliband. It is telling us it is able to lock in the supply of energy for the full period through contracts for future delivery. And, even more interesting, it is saying that the escalation of ‘green’ costs isn’t going to imply that prices in a year’s time are any more than at the moment. Or, at the very least, that it can absorb any increase within its operating margin.

This may seem a technical point but I think it is absolutely central to the energy debate. SSE is saying it can handle a Miliband freeze. And, second, SSE is showing us that ‘green’ charges are relatively small, relatively predictable and will not rise excessively.

Underlying wholesale price rises

Drax, the coal and wood power station in Yorkshire, is an independent company. It doesn’t have an arm that sells power to domestic customers. It publishes the prices it obtains for its supplies, sold into the wholesale market, which amount to about 6% of the UK power need.

Helpfully for our purposes, it also says at what prices it has sold its promises to deliver electricity in the future (‘Futures contracts’). It sells almost all of its output well in advance of production, also buying the coal and wood to make the power through long term contracts. This enables it to lock in its margins and profits in advance.

Here is what Drax got for its power in 2011 and 2012 and what it has sold electricity for in the period to 2015. All figures are per megawatt hour.

2011 (actual) 2012 (actual) 2013 (contracted for rest of year from July 2013) 2014 (contracted) 2015 (contracted)
£51.3 £55.6 £51.4 £53.5 £56.1

Source: Drax annual and interim reports

What does this tell us? First, that if SSE had bought its power from Drax it would be seeing a lower cost for the rest of 2013 than in 2012, not the higher prices it claims and, second, that 2014 prices are also lower than last year. So SSE should be able to offer a fixed price deal at a lower price that today, rather than raising its prices by more than 8% in November. Unless I am missing something major, rising wholesale electricity prices provide no justification for today’s increases from SSE.

I couldn’t obtain exactly comparable data for wholesale gas prices (though such information does exist if you have access to the price services of Platts and others ). Nevertheless from what I can see today’s wholesale gas price is pretty much the same as it was this time last year at about 2.2 pence per kilowatt hour or just under 30p a therm. If anybody has access to wholesale gas prices on spot or futures markets from 2011 to 2015, I’d be very grateful for the information.

In an earlier post on this web site I suggested that the Miliband plan could tip the energy companies into buying long term contracts for the supply of power rather than relying on volatile and expensive spot markets. I think that case I argued is strengthened by the two points I've made today.