Thread by @RichardJMurphy

Making sense of energy price rises is important. They’re going to be the cause of a lot of poverty in the UK, soon. So, I’ve been doing some analysis. What follow is a bit simplified, but not too much. What it reveals is that you’re about to be ripped off, massively. A thread….

In January 2020 SSE suggested that the cost of the energy they supplied was broken down as follows:

Let’s take that SSE data as a reliable benchmark for what’s happened to date. And let’s assume that all the data that I can find that says that the average house paid £1,200 a year for fuel in 2021 is also right. It was pretty much for me, for example.

Now let’s base what energy costs might be on the fixed prices now being made available by the same energy suppliers who were happy to supply our electricity and gas for £1,200 last year. It seems around £3,000 is that new normal. Again, it happens to be for me.

So, the price is increasing by £1,800. But the cost of some things has not changed. For example, the costs of delivery, billing and customer services have not changed, certainly by much. Nor should government and environmental schemes cost more.

To be clear, delivery cost £288 on average in 2021, and I am assuming it still does. Billing and customer service cost £240, and still should. And green and other levies cost £156, and I see no reason why they should change. That’s £684 of cost that should not change, at all.

The government is still taking 5% in VAT. That was (and this is near enough) £60. Now it’s £150. Why you need to be penalised with £90 of extra tax for energy costs going up is for the government to justify. It’s a decision they seem happy with. Take it up with them.

So, of the new £3,000 cost we’ve explained £684 of fixed costs and £150 is VAT. That leaves £2,166 to cover the cost of buying in the energy sold to you and profit.

In 2021 the cost of bought in energy was 36%. That was £432. I’ve checked the accounts of UK based energy company. I used SSE again, because that seemed fair. They made a normal profit margin of 11.6% in 2020 and 13.3% in 2021, or about 12% on average.

SSE both makes and distributes energy. Now this is a little simplistic, but let’s assume they make 2% on distributing energy to us and so made 10% on making energy. The profit on energy distribution was £24. That on the bought in energy was, then, roughly £43.

So now we can work out that the cost of producing the energy that was sold to you in the last year was the bought in cost to the distribution company of £432 less £43 (near enough) of profit the producer made, or about £389 of real cost of production for the year.

Now let’s assume the profit margin on distributing energy remains at 2%. With the average cost of domestic energy increasing from £1,200 to £3,000 that puts the distribution profit per customer up to £60. That’s two and a half times what it was before. That’s a big jump.

And let’s be clear, that none of the cost of producing energy in the world has changed because of war in Ukraine. In fact, right now, there is not even a shortage of energy in the world because of that war: Russia is still supplying oil and gas right now.

So, the only reason for price increases is because oil and gas dealers expect a shortage in oil and gas which has not happened as yet. Bluntly, what we’re seeing is panic buying of oil and gas that’s still in the ground right now by countries terrified that they might run out.

It’s vital to remember this: oil and gas are going up in price because people – oil companies, hedge funds and others - are speculating in oil and gas in the expectation that there will be shortages. No one actually thinks the stuff is going to cost more to produce.

So, let’s summarise where we are in this table:

Please accept that some of these numbers will be give and take a bit, but probably not that much. I think my assumptions are pretty fair.

Then notice that the first three lines in this table have not changed. These costs are near enough fixed. The government meanwhile is going to take £90 a year more off you whilst the distribution company is going to make £36 extra profit a year out of you.

And then note that the electricity and gas suppliers to the distribution companies are going to see their profits increase almost exactly forty times, from £43 a year to an extraordinary £1,717 a year.

That’s where your extra payment is going. It does not disappear into a black hole. It goes to oil and gas companies, power generators, the countries and shareholders that own these, and of course to the speculators who are currently making billions out of this.

To put this in context, it’s estimated that the price of UK energy is going to increase by £38 billion. That increase will be split between the government (£1.9 billion), the energy distribution companies (£760 million) and oil, and generation companies (£35.34 billion).

In plain straightforward terms that is profiteering – or exploitation if you like – on a quite staggering scale. Brexit is the excuse for some. Covid was the excuse for more. And now the war in Ukraine is being used as an excuse for the biggest rip off of all time.

Four questions then. Why is out government accepting this? Why are governments elsewhere accepting this? Why aren’t they cooperating to stop it, individually or together? They could. They aren’t. So, what is going on here?

I look forward to answers from ministers and justifications from oil companies. And in case I have anything wrong, I look for clarifications. But the explanation I seek is why is war being permitted as an excuse for a massive rip-off of ordinary people by big oil companies?

ADDITIONAL MATERIAL ON SUNDAY 13 MARCH. Thanks to so many who have read this thread. I can’t answer all the questions individually so I am doing to post some additions to the thread to clarify some issues.

First, to all those asking about the extra standing charges they are paying, which are often double this year to what they were last. I can’t see how these can be justified. In my calculation, I assume they should be fixed.

If standing charges have increased for a reason then the energy companies need to say why, and precisely what and who is to blame. If it is Brexit, say so. If it’s poor regulation, say that too. But explain it so we know who to demand change from.

Second, it’s been suggested I do not appreciate the split between energy creation / generation and energy distribution companies. I am confused by this claim. I thought it obvious from what I have done that I have made this split.

I have done a bit more checking though and think that I was, maybe, generous in assuming 10% profit in oil companies. Some don’t make that. But all that means is that their profit increase is even bigger. The logic remains intact, in other words.

Third, some say I am ignoring the economics of scarcity here, and that the price rises are justified that there may be 11% less oil and gas supply in the world if Russia is cut off from supplying that oil and gas to Europe and beyond.

I have several responses. One is I guess I know some economics or I would not have been a professor of political economy for five years. Two, theories of economics are just that i.e. they’re theories about how pure markets work.

Pure markets say scarcity increases prices. Political economy says something different. It says that those with power can influence markets, for better or worse. In other words, what economic theory says can be changed in reality, but it takes the powerful to do so.

Right now the powerful in this game appear to be the oil companies. They are exploiting us all to make exceptional profits. That’s what my evidence shows. However you play with the numbers the answer will always be the same: they’re exploiting this situation.

My answer to that is that for well over a century governments have challenged the power of those exploiting markets and the power they give to large companies to make profit at the expense of everyone else. This is a process that began in the US, surprisingly.

In the US they have what are called Antitrust Laws whose whole purpose is to prevent the exploitation of consumers by companies in the marketplace. My argument implicit in this thread is that this is what governments around the world need to be doing now.

More than that, I’m suggesting that if we want to stop Putin winning by making sure millions of people don’t demand the end of sanctions on him because those sanctions lead to them being exploited by energy companies then we need cooperation now to end international exploitation.

Political economy says we can do that. We can reallocate energy supplies between nation states to stop the risk of energy rationing in some. We can use international tax laws - including some I helped create - to track down the profits of energy companies and tax them.

And we can also impose taxes on energy companies at home. There is a straightforward case for a massive increase in taxes on energy companies right now - to be applied to their excess profits, but nothing more.

But more than that, there is something else the government can do. Ofgem, a UK government regulator, does in effect sets UK electricity prices. And it, in effect, prices that energy at the cost of the highest component element in the energy mix - which is gas.

What this means is that even though most electricity is not generated from gas in the UK, we pay for it as if it all is. So the price has skyrocketed even though we all know that the cost of creating renewables, nuclear, hydro and even coal power has not changed.

The government could change that regulation now and bring down electricity prices overnight. France provides evidence that this is possible.

Just as the govermment could also keep green levies fixed (but very definitely keep them, please). It could also cut the rate of VAT so that it takes no more money from us now.

However, none of these things, all of which are possible in the political economy, are happening. So there is a failure of our politicians to stand up to the power of energy companies here, nationally and internationally. And I am calling that out.

Finally as an addition, I know - and said - that the numbers may be a little simplified, but not much. But I would add, that’s just fine. I am showing what can and cannot be controlled, and by who, and I am showing who is exploiting us. And that is deliberate.

This thread is in itself an exercise in political economy. Using the power of logic - and everything I have argued is logical and subject to minor simplifications likely to be as close to the truth as is needed to prove a point - I can show we’re being exploited.

That’s my aim. I want to use the power of Twitter to say that something different to what we are told is inevitable is in fact possible.

What could be different:
1) VAT could be cut
2) Excess profits could be taxed
3) The pricing formula used by Ofgem could be changed and the price of electricity could be cut, a lot
4) Standing charge increases can be challenged
5) International cooperation is possible

What can you do? First, share this.

Second, write to your MP and ask them:
1) Why the gov’t can’t cut the rate of VAT on domestic energy to control prices, when Brexit permits this;
2) Ask why we can’t have an excess profits tax on energy companies;
3) Ask why Ofgem can’t change its electricity pricing formula.

Third, tell your energy company you are not happy. Ask them what they are going to do about this. Post the answers on Twitter.

Exploitation is not acceptable is the message we need to deliver. And right now we are being exploited.