Aspiring to prejudice – against Scottish commerce

Aspiring to prejudice – against Scottish commerce

by Eben Wilson
article from Monday 16, October, 2017

FOR SOME YEARS now we have come to recognise that the SNP prefers to announce aspirations rather than engage in practical policy measures. In recent weeks, however, we have at last seen some policy decisions – and they tell us a lot about the worldview of this administration.

The decision to ban fracking was driven not by science or an eye on commercial advantage for Scotland but by political prejudice; the SNP needed to retain support from the Greens and maintain its own populist stance; seeking what the Minister Paul Wheelhouse called its “social license” but many would call it a majoritarian cop-out from responsible governance.

Now we have a plan to create a nationalised energy company, aimed at supporting the needs of the less well-off energy consumers and transparently prejudicial against ”shareholders” and “highly paid corporate executives”, and dedicated to not making a profit. A better example of nested prejudices based on economic fallacy would be difficult to find.

If we put the vote-buying motives to one side, there are some important questions to ask about the idea of a nationalised energy company, most obviously, why?

Between April 2015 and 2016 fourteen new energy suppliers were licensed. They now have more than 15 per cent of the market. The six large suppliers have lost market share, with profit margins declining. Switching rates are rising slowly, but more rapidly through time; around one in six now switch each year. What’s happening here is that competition is increasing. Consumers now see prices going down as well as up (the latter being the only direction in the days when energy was completely nationalised).

This is economically important, and also where the socialists who dream of nationalisation make a huge error.  Competition involves much more than merely putting pressure on prices; it has to be seen as a process whereby new knowledge comes into a market.  The realisation that many consumers are still on coin meters, that many are in debt to the suppliers, that they are often in the most energy inefficient homes, and that those who switch less tend to be the more vulnerable is a major gain in understanding created by opening up the energy supply market.

The market is already responding through switch advisers, on-line aggregators, energy efficiency advice and community co-operative schemes – all working to push information about how best to use priced energy in the specific circumstances of specific users.  The state can have a role here, but not at national level; it is much better to concentrate these efforts locally with a proper individual focus.

You have to ask precisely how a nationalised energy supplier can help in this already changing melee? If the aim is to deal with vulnerable consumers that may well be a worthy goal. If, however, the method involves doing what a lot of others are already doing but is driven by prejudicial notions of profit and fat-cat salaries – the potential for a genuinely damaging policy intervention is very high, with the added risk of actual disruptive and harmful intrusion in the market.

Let’s get one thing clear from the start, this isn’t an energy company, it’s an energy contract broker and a consumer billing company with added household equipment servicing overheads. As such, it may appear to be an easier play than one that handles fuel sources and generator sets using a large workforce, but this brokerage will enter a market where in reality margins are difficult to create and generally quite low.

The wholesale energy market where it will buy supply for its consumers sees prices fluctuating all the time, often quite rapidly. The job of the retail company is to smooth prices out for consumers and provide quality service support.

Ironically for her socialist focus, Ms Sturgeon says that the new company’s “only job is to secure the lowest price for consumers” – precisely what competitive retail markets already do for consumers without government intervention, with the added bonus that competing on customer service gives them some flexibility in pricing.  But economic confusion has never stopped the Scottish Government turning ploughshares into weaponry destructive to markets.

A second question is therefore the opposite of my first – why should we not have a nationalised energy retailer?

Clearly, there will be considerable start-up costs; buildings, IT with call centre facility, finding managers and staff, organising the market offer and promoting it to consumers.  Taxpayers should also have a few questions to ask about running costs; are staff going to have inflation-proofed final salary pensions; will its head office be in an expensive city centre; will it need to borrow working capital? Will it offer improved customer service; will that be targeted at struggling vulnerable customers; those with bad debts who are expensive to service well? Those tasks should mop up the gains of not-for-profit and delight the competing private companies.

In short, has anyone thought about how this business has to be run and how a government – with billions of present day costs, a large deficit and a huge existing administrative load – is going to resource and manage this new entity? Remember, this is the same government that cannot pay farmers their grants on time.

And given the costs, has anyone actually thought what “not-for-profit” actually means? Ms Sturgeon fudges this with "as close to cost price as possible" which means nothing if you do not know what the costs are.  In essence, “not-for-profit” is really only another prejudice.

Scottish taxpayers should not underestimate the risks of being an energy supplier, especially in today’s world where we have ageing nuclear power stations, an unbuilt new base load supply, distant gas supplies often controlled by unstable regimes, intermittent small-scale and costly renewables, political environmentalism, uncertainties of supply in war zones and climate variability that seems to be increasing.  Plug those strategic issues into the complex tactical management need to service customers’ billing and support needs and you can see why making a decent margin matters. 

And Ms Sturgeon really ought to learn that shareholders matter too. Apart from the fact that they are often pensioners who use the money to pay their energy bills, they are also those who re-capitalise companies when they need support through difficult times.  Capital markets reduce risk for capital intensive industries.

Even Karl Marx pointed out that capitalism deals with these risks through profit and innovation to generate superabundance; socialism, as we know from years of evidence from our nationalised public services, especially the NHS, deals with them through rationing.  And when turbulence occurs, governments tend to make things worse by introducing price controls or regulations; which in the longer term always make things worse for consumers. 

This is where the idea that the state can successfully run a not-for-profit nationalised energy supplier becomes seriously worrying.  Politicians cannot accept failure; civil servants demand risk reduction by gold-plating service provision. If commercial factors act against competitive pricing and profit is not allowed where does a state player turn for help? History tells us that they change the mission.

After a year or two of desultory trading, offering prices very little different from private suppliers, it is likely that we will see added objectives and meddling by politicians in the new nationalised supplier.  There will be an adjusted focus towards mandatory energy saving; new building standards, energy use efficiency and so on.  A way will be found to bury what will be in essence be hidden state aid in a social enterprise supported by the central state. Some measures will be mandated of private suppliers, adding to their costs.  In the process, the state will actually damage competition and innovation, consumers and taxpayers will both lose out with the less well-off hit hardest as always.

A far better approach for the Scottish Government to help the vulnerable would be to concentrate on making the priced options offered by existing suppliers transparent.  All households should be on term contracts, with renewals set at a maximum of three years; that is we all stay or switch at least once tri-annually. 

The state should concentrate solely on the transparency of information provided to consumers. It should have no role as a supplier, but instead act as a champion of the consumer.  And if some consumers cannot afford their energy, that’s a social support problem, not an energy supply issue.

Scotland cannot thrive through prejudicial vote buying; governance by majoritarian socialism is the worst way to make poor people more comfortable.

Photo: A chart from ofgem showing how the average household bill is broken down. EBIT represents the profit margin before interest and tax - at 5 per cent is the same as VAT.

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