DATAMONITOR: Why the UK energy market isn`t working
Nov 19, 2004 M2 PRESSWIRE
London- The UK energy market is suffering from high and volatile gas wholesale prices and Energywatch is accusing producers of manipulating the market.
Rising wholesale gas prices have forced up power prices and the consequences are being felt by consumers, from the very largest to the smallest. Not only are gas prices high, they are volatile, making life even more difficult for major energy users for whom contract prices are often closely linked to wholesale prices. Ofgem`s initial report into the matter pointed to the UK`s increasing reliance on imported gas and the lack of import capacity in the UK / Belgium interconnector. Ofgem is now investigating certain gas supply contracts (comprising approximately 5% of the UK`s daily volume) that may have prevented gas from reaching the market.
According to Andrew Hill, Datamonitor`s lead analyst for wholesale energy markets: "At the time of the price spikes there had been rumours of market manipulation, though the Ofgem investigation ruled that these allegations were unfounded."
Whether or not deliberate market manipulation has taken place, the rapid availability of information regarding short-term gas inflows on a field-by-field basis would lessen wholesale price volatility. This information can be obtained from the DTI, but only long after it is needed for this purpose. Energywatch would like real time data to be made available, according to Will Keast-Butler, Datamonitor`s lead analyst for B2B Energy markets. "Much as market structure is important, Datamonitor research into the B2B retail market shows that both suppliers and their customers should look much closer to home to find both causes of, and solutions to, their predicament."
Suppliers are not producers, and they are not doing especially well in the current market climate. Furthermore, some of them are doing a good job for their customers - effective levels of customer service and customer satisfaction vary widely
To begin with, one must draw a distinction between producers and suppliers, especially for gas. When industry watchers voice accusations of market manipulation, they are referring pointedly to the organisations responsible for pumping the gas from under the ground and bringing it onto UK shores, Hill says. "It is true that gas producers (such as Statoil, Total, BP and Shell) are doing very well out of high gas prices, but no one else is. Meanwhile other major gas suppliers, such as E.ON and RWE are having their margins squeezed."
"Some of the gas producers, such as Shell and Total, have their own retail departments, which will be suffering lower margins because of high gas prices, and BP recently pulled out of the retail market altogether."
And in power markets, even the producers are not benefiting from rising prices, because power prices have been driven higher by rising fuel prices (for CCGT operators): spark spreads have not moved much, Hill says. "The one major exception is British Energy, whose costs will not have changed, although it is suffering from the fact that it signed a lot of supply contracts at the bottom of the market and therefore cannot take full advantage of rising wholesale prices."
"Thus neither power suppliers nor power producers are benefiting from the current situation."
And they certainly do not benefit when prices are volatile: fear that any price quoted will rapidly become uncompetitive or painfully costly prevents them from quoting many days per month, or only offering unrealistically short windows for the potential client to respond, Keast-Butler says. "Suppliers may even have to ignore some customers altogether because wholesale price volatility amplifies the risk of any given load profile. This is reflected in the attitudes of energy buyers towards their key account managers. Amongst power suppliers, only Scottish Power`s key account managers rose in the opinion of their clients, compared to their performance in 2003. Gas suppliers suffered similarly, including Shell Gas Direct, the market leader in terms of customer satsifaction."
Not only are suppliers not profiting unduly from the current situation, some of them are doing a good job for their customers, particularly Shell (also a producer) and Scottish Power. Scottish Power has made an impressive improvement in the quality of its customer service, partly through the implementation of a six-sigma programme. Shell, whilst making large profits from high gas prices, has consistently been the favourite gas supplier in terms of customer satisfaction, Keast-Butler says. "Even suppliers who did not perform relatively well in Datamonitor`s research have been making an effort to improve; customer satisfaction is widely seen as a key indicator of the sustainability of a B2B operation and a point of differentiation."
Suppliers have, however, made a rod for their own backs: they have not segmented the market as effectively as they could have done, and are therefore coming to market with `one size fits all` strategies, meaning that customers are often receiving sub-optimal offers. Because of this failure to understand their customer`s real needs, they have not done enough to educate them.
Customers have been encouraged to adopt procurement strategies that are effectively speculative - much to their detriment. Moving away from the `all or nothing` contract renewal in October would reduce their exposure to market volatility, which would also benefit suppliers
By their nature, MEUs are all short and everyone knows they are, which puts further pressure on prices. They could also dampen the effects of volatility, and avoid being squeezed, by splitting their annual contract into a series of quarterly or monthly contracts that could be renewed periodically, averaging out the peaks and troughs in the market, Keast-Butler says. "Instead, brokers have been encouraging them to speculate, which is a problem when you don`t understand risk very well, as they don`t."
The upshot?
Although market mechanisms may not have been operating as effectively as they should, much of the blame for current market conditions can be placed on energy users and the utilities that supply them. This is because more reasonable procurement strategies would enable users to overcome much of the volatility in the market, and the adoption of such strategies is the responsibility of suppliers, users and their advisors, Keast-Butler says. "Suppliers are focused on providing their customers with quality service- which is advisable- as Datamonitor finds a direct correlation between customer satisfaction and the number of new contracts won. There is clearly a role for customer service in energy retail and it is essential that suppliers appreciate that this goes beyond bill accuracy and query handling and should include customer education - a role essential to the smooth running of the whole UK market."
Notes for editors
*UK B2B Energy Buyer Research 2004
Datamonitor B2B Energy lead analyst Will Keast-Bulter, and Wholesale Energy markets lead analyst Andrew Hill are available for comment.
To arrange an interview or for further details regarding the report contact Matthew Dick in the Datamonitor Press Officer on + 44 20 7675 7824, or email mdick@datamonitor.com
We would be grateful for a copy of any article which makes reference to the information contained in the above release.
Datamonitor plc (DTM.L) is a premium business information company specialising in industry analysis. We help our clients, 5000 of the world's leading companies, to address complex strategic issues. Through our proprietary databases and wealth of expertise, we provide clients with unbiased expert analysis and in-depth forecasts for six industry sectors: Automotive, Consumer Markets, Energy, Financial Services, Healthcare, Technology. Datamonitor maintains its headquarters in London and has regional offices in New York, San Francisco, Sydney, Tokyo, Frankfurt, Shanghai and Hong Kong. See www.datamonitor.com for further details.
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