When The Fun Stops, Stop – Helpful advice appended to gambling company advertisements in UK, 2022
Let’s start with an analogy. Everyone likes analogies. Imagine a farmer and family. They run a smallholding. It provides them with food and a little left over which they sell to buy fripperies like horse-shoes and beads and so on. They produce a diverse crop so, if one of their vegetables has a bad year, they’ll probably be okay because another vegetable can pick up the slack. (It’s just an analogy – don’t get too hung up on the details.)
One year, the weather is wrong in some analogy-type non-specific way. Maybe there are floods. Yeah, that’ll do. But our farmer is fine because the smallholding is at the top of the hill so the crops are looking peachy.
But overall there’s a shortage in the county. The rich folk from the city are keen to have their usual amount of potatoes/grain/wheat so they’re offering more money than the locals can afford. Our farmer looks at his crop, looks at the big number that’s on the piece of paper with the order on it and decides he’s going to go for it. He sells the lot. He is an entrepreneur.
Our farmer now has a lot of money. But he has no food. That’s okay though because (a) he’s got loads of money and (b) he has a bit of slightly stale food left over in his larder. That’ll tide him over. And maybe his family too.
Next year it all goes wrong again but this time our farmer’s crops have failed too. (Drought? Yeah, that’ll do.) The price has gone even higher so even with the profit from last year, he can’t afford to buy enough food. He has got plenty of gold pieces to look at though, so it’s not all bad.
In a desperate attempt to avoid starvation, he sells the smallholding to an investor who then employs him (at a very low wage) to work the farm. Good news is that he keeps his home and his job. Bad news is that he doesn’t own any of the food he grows and can only buy it at full market rate like everyone else. He divides the amount of money he has by the estimated annual cost of buying enough food to stay alive and decides that it won’t see him through his working life and retirement. So he turns to crime. The end.
So, yeah, that’s basically what’s happening with electricity in the UK at the moment. We’re all the farmer except that we didn’t decide to sell all our food one year or to sell the farm. No – someone else decided that for us. (We also haven’t decided to turn to crime. Yet.)
Electricity From The Before Times
Once upon a time, the UK produced its own electricity by digging up coal and burning it, or digging up oil and burning it, or digging up gas and burning it. The National Coal Board, British Petroleum and the Central Electricity Generation Board were all state-owned, operating for the good of the country and set up to ensure energy was fuelled, produced, distributed and sold.
Was it perfect? Obviously not – what is? Did it pay vast dividends to shareholders? No. Did it invest in national infrastructure? Yes. Could it have been more efficient? Probably.
Was the price of energy dependent on the whims of the international market or on the cost of fuel, generation and distribution (which were presumably relatively stable)? I’m going to go with the latter.
If the theoretical price of a therm of natural gas spiked on the international market, did it decide to charge itself a much higher rate and then have to pass that cost on to the customer?
Electricity Recently
And this is when the magic of the casino enters proceedings. And what is the one rule that always, always, ALWAYS applies when discussing casinos?
The house always wins. (No, not your house.)
Sure, there’s always a guy over there who’s sitting by the slot machine when it starts pouring out an unending (and, frankly, inconvenient) river of coins. But, overall, the people who run casinos never have to worry about paying to keep the lights on because of all the other suckers, the sad-faced ones, the desperate mugs, the tragically drunk and the heart-rendingly sober. Did their fun start? If not, how will then know when it stops?
After the dismemberment of the electricity system in the UK, the public were left with a bewildering array of options for buying electricity, all priced in subtly different ways, difficult to compare and full of financially punitive little traps. Newly privatised fragments of the companies found accountants and lawyers who could help them squirrel as much money away in hiding places as possible (because that’s always good for running an efficient utilities company) and settled in for some hard graft.
And, as with casinos, there’s always the guy in the spotlight who has found a genuinely good value tariff and is happy with his time in the casino. But he’s the exception and, all around him, are the others who don’t know how to play the game, or don’t realise it’s a game, or don’t think there’s any difference between staying put and entering the hall of mirrors in order to move their custom elsewhere. (Which, of course, means receiving a bill printed in a different colour, with a different logo on the top and a different pricing structure that may, or may not, end up cheaper than before.)
Do we fix our prices in case prices go up? Do we stay on a variable tariff in case prices go down? Do we take a slightly worse rate in order to use a company less likely to get the bill wrong, leading to overcharging and six-to-six hundred months of never-ending phone calls to try to get it corrected?
Roll up, roll up. When the fun stops… Oh? Hasn’t it started yet? But that guy over there is having fun – look, he’s just saved ten pounds per year by spending three hours arguing about standing charges.
Just imagine the national productivity figures! Here we are wasting hours of our time fiddling around with utility bills and the utility companies themselves are wasting millions of pounds paying people to create these fiddly bills, explain these fiddly bills, correct these fiddly bills, deal with angry, sad, confused or desperate people who don’t understand their fiddly bills. And so it goes. Does this help GDP?
Electricity Now
About 40% of the UK’s electricity is generated by burning gas. And gas is bought on the international market at whichever rate has been agreed by your supplier – either a bulk advance purchase at a pre-agreed price (gambling that the price will go up), or on a day-to-day basis based on current market rate (gambling that the price will go down).
But bear in mind that the price has absolutely nothing to do with extraction and distribution cost. Go back to our farmer. It didn’t cost more to grow the crops in years when the price was high – no, the scarcity meant that those with more money could outbid others, hence the sale price was elevated.
This is the world of the casino. Never mind what something costs (which is fairly predictable) – instead you must gamble on whether someone else, for a variety of reasons, might hike the price or even (surely not?) reduce it.
And the theory goes that, when extracting natural gas from our own territory, we must sell it (to ourselves?) at the international market rate because, if we don’t, like the farmer above, we’ll sell it all to a higher bidder and be left with none for ourselves.
Of course this is also complicated by the fact that the people actually extracting the gas are not working on behalf of the UK. They are employees of a few vast multinational enterprises that are most interested in profit and therefore the highest bidder. The fact that they also receive fairly hefty tax breaks from the UK in order to… (er, not sure), counts for nothing. If they can get more elsewhere, they will. So – pay up, Britain! Remind me why we don’t have a state-owned business doing this on behalf of the population?
It Gets Worse
So if the cost of a bit of gas goes up by a factor of three (for example), that should mean the market cost of a unit of electricity goes up by about 1.2 (because gas is only 40% of the fuel used when generating electricity). Right?
Wrong. It goes up by a factor of about three.
And why is that? Because if we don’t pay the maximum rate to the electricity generator who uses, say, nuclear power (whose running costs are, I suspect, more or less unchanged) – then they will simply sell their electricity to someone else who will.
Or at least that’s the theory. Can a nuclear power station in north-west England really sell electricity to a neighbouring country?
(Technically it could but, given that the UK’s electricity is already expensive (compared to nations in the EU) and, given that the UK is not in the EU (which probably just makes the contracts messy and unhelpful), it’s not clear why anyone would. On top of which, the UK imports electricity from France – let’s hope that’s because the price is lower.)
But why doesn’t the free market help the customer here? Why doesn’t this nuclear power station undercut the gas power station with its super-cheap electricity units in order to deliver value to the customer and keep prices down? Could it be because the free market theory is actually bunkum and is only working to keep all prices as high as possible? Could it be that the free market here actually only serves to push the price upwards whenever possible?
It Gets Even Worse
Consider another means of electricity generation – solar (or wind, or tidal). The sun is definitely not any more expensive and the panels (turbines, etc) don’t need to be renewed more than every decade or so.
For (many) years, when solar was an expensive option, it was supported by an extra levy on everyone’s electricity bills. Some people chose to have all of their electricity nominally generated sustainably and, for them, the levy was even higher. This was supposed to be a good thing, to get a young industry on its feet so it could dodge and duck and weave with the big boys.
And, having propped up this sector for (many) years, now that its power is actually cheaper than other options, we get to reap a harvest, right?
Wrong. They’ve hiked their prices up to the maximum (i.e. to match the price of gas-sourced electricity) because, a unit of electricity is a unit of electricity is a unit of electricity (etc) and it wouldn’t be fair if the gas boys got paid more than the sun boys.
Fixing The Problem
Get a state-owned enterprise to run extraction and generation – then the prices will be based on the cost of doing business, not based on the cost of outbidding other nations.
(Imagine if the farmer had resisted selling off all his food at the top of this chapter. Because selling off a vital resource in order to obtain money that may or may not enable you to buy what you needed in the first place is not always the right answer.)
Then set consumer prices based on the actual cost of generation, i.e. let it move dynamically depending on the mix of sources on a day-by-day basis. Given that we currently only pay the highest possible rate, this can only lead to lower bills. On sunny, windy, tidey days, the price will slump and this will be a good thing.
Finally, make the purchase of oil/gas on the international market the option of last resort. And, even then, make them an offer below the so-called market rate. It hasn’t cost them any more to extract – so why are we feeding their greed? Is it because they’d sell it to someone else at the higher price if we don’t? If so, why not set up an alliance with other countries to set a price cap. Not a tightly fitting cap that gives the poor company a migraine – no, a price cap that gives them a fairly thick and tasty profit margin but not an obscenely yawningly wide profit margin that impoverishes all before it.
That international alliance could be given a catchy name. Just spitballing here but if it were, say, a group of European countries that decided to unite around some basic principle, you could call it the European Union.
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