Heads You Lose, Tails... actually, we don't have a tails

The Great British Energy Price Off (Part... I dunno, I lost count some time ago)

For those concerned about escalating energy prices, whether the UK government's support package is sufficient and whether 'we' will be paying off this 'debt' for generations to come... here's something else to worry about.

Businesses.

Phew, you might think. I don't run a business. I'll cross that off my list of stuff that keeps me awake at night.

But do you ever buy anything from anyone? If so, increases in business expenses will have to be passed on to the customer. You do realise who that is, don't you?

It seems that energy companies might be massively profiteering from the 'differently' regulated tariffs for businesses. (I only said 'might' because I don't want to unfairly malign them here by jumping to conclusions. I'll leave you to jump to your own conclusions.)

Also, we're not talking about 'unworthy' businesses (whatever they are). No, the Chief Executive of Care England (which represents care homes amongst other things) has said “We believe there can be no justification for charging such horrendous and financially crippling rates."

The owners of care homes, together with the owners of pubs, restaurants and, presumably, many other businesses, are aggrieved that the wholesale price of gas has gone way, way down recently. But their bills are continuing to reach for the skies.

(Read the full story here.)

The key line I'd like to bring to your attention is this one:

"Suppliers have argued that uncertainty over the future price of gas and electricity has made determining the price of contracts difficult."

And this is the territory of 'heads you lose, tails... actually we don't have a tails'. Yes, I know I made that joke in the title. I thought you wouldn't mind a bit of recycling.

So businesses are being asked to pay far more than the current 'market' price at the moment, just in case the price goes up in a month or two (or six or twelve or twenty or whatever). Let's look at the options here:

• Right now, the energy company will be making a nice healthy profit as they're charging significantly more to supply the energy than it's costing them to acquire it.
• If the price does go up, the energy company will be fine (phew!) as they won't be stuck with having to supply at a loss (just have to put up with a smaller profit -- boo!)
• If the price instead goes down, it's bumper bonus for the energy company (double phew!) as now they're making an even bigger profit.
• If the price goes up even further than the energy company predicted, they might make a loss. But...
• (a) they've probably set the contract price so high that this is vanishingly unlikely (from the article -- "companies were being charged 25p to 40p per kilowatt hour, far higher than spot prices of about 3p")
• (b) by the time this vanishingly unlikely high wholesale price kicks in, they'll have made so much profit from their customers that this won't be an existential threat to their business anyway.

I'm going to assume that owners of care homes, pubs, restaurants, etc have thought of the following and that neither would work:

• Just move to another energy company. (Ha ha ha ha ha ha. Let's not kid ourselves that one of them is missing out on this feeding frenzy by trying to actually compete on price to gain customers.)
• Don't take a contract -- just buy at the 'spot' price (i.e. current variable rate). This isn't really an option because energy users can't buy from the generators and have to go through a (leach) energy supplier company.

Overall -- fake competition is driving up prices

Real competition between rival suppliers would drive down prices.

Fake competition between suppliers acting as though they were a cartel drives up prices to the highest possible point, then a little higher. Oh, and then higher again when it turns out they can get away with it. (Yes, I know they're not really a cartel but it sure looks, feels and acts like one.)

Where next?

The initial days of the energy crisis caught the smaller suppliers with their supply trousers down. They had agreed fixed price contracts with too many customers at prices that turned out to be unaffordable when the wholesale price rose.

Without some money in the bank to keep them going over this period, these small companies went backrupt, unable to fulfil their supply obligations. Any profit they had made previously had been safely tucked away as dividends, directors' pay, whatever -- and so the company ceased to exist, fell off its perch and the supply of all their customers had to be picked up by other, less bankrupt companies.

Interestingly, the cost of continuing to supply these customers at below market rate fell to the general public. Part of your higher bill is to subsidise those whose fixed price contracts bankrupted their supplier. Ah, you say, wouldn't it be fairer to claw back the profits those companies made in happier times since they should have prepared for this eventuality? Ah, you say, wouldn't it be easier just to bail out the company without driving it to bankruptcy? Yeah, neither of those was ever going to happen.

And now it's happy times for energy supply. Prices continue to go through the roof thanks to the 'free market' approach of ensuring the maximum price is charged at all times.

The customer doesn't see this though, thanks to the 'price cap'. This is a maximum amount that the energy suppliers can charge. Well, it's the most they can charge the customers. But they then work out the difference between that figure and what they wanted to charge the customers -- and they collect that from the government instead. (Bumper cash bonanza!)

Where does the government get that cash from? From you, of course. They've gone to the money markets, taken a massive loan in your name and will expect you to repay it over as long as it takes.

So where is the money going? Energy suppliers and banks.

And for what?