Friday, 23 August 2013

When less means more....why electricity prices will rise and rise....

Electricity prices are going up – that much you already know from your bills.  You'd think the only option is to use less of the stuff....

Well, get used to the idea - they're going to continue to go up, and the less electricity everyone uses then the higher the prices are going to be.

Why is this ? 

Some commentators blame energy price rises on the lack of new oil and gas reserves, the expense of their extraction, or political instability in the major producing regions.

However, the real reason is much simpler.  Do you really think that the shareholders of these energy companies are going to suffer simply because you use less of their product, particularly when they feel they're forced to operate in a grossly distorted market ?

In a way, of course, they have a valid point... 

Electricity cannot effectively be stored in large quantities and therefore energy on demand is provided by standby and swing capacity units, namely thermal power stations - those things that burn fossil fuels to keep the lights on come what may.

Forget the wind farms, when the wind doesn't blow the standby stations have to kick into action and make up the entire shortfall between demand and supply. 

The trouble is, of course, that all of the fixed costs associated with maintaining and operating a 'big block' asset must still be met even if it's producing nothing at all for periods.

There's debt to be serviced, sustaining capital to keep the asset up to scratch, spare parts for equipment, maintenance costs and plant operators sitting around doing nothing at all but making themselves available 24 hours per day for when the big block needs to kick into action.   

And all this against a backdrop of increasingly stringent and costly environmental, employment and health & safety legislation with which it's necessary for them to comply.

So, the way the owners of these big blocks see it, and perhaps with some justification, is that why should they lose money by keeping an increasingly unproductive but essential national asset in continuous service when it's under-ultilised, and the reason it's under-utilised is nothing to do with basic market economics but rather a deliberate result of political policy  ?

When we all use less electricity, these essential assets will become even less cost-effective, their output will fall further but their fixed costs will keep increasing through inflation etc and they'll still need to make a decent return for their shareholders, and therefore it's inevitable that prices will keep rising.

However, remember that we mustn't unduly concern ourselves with what we can't control – we can't influence government policy or persuade the energy companies to supply their products to us for less.

So, just ignore the external factors but do your bit to help yourself by saving all the energy you possibly can, and don't be at all surprised in a few years time when you've reduced your electricity consumption by a third, but find you're still paying more in total in real terms for much less energy than you're using now.....


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