You can’t eat a credit score: The ugly facts

Privatisation: The selling spree began in the 1980s as an ideologically motivated attack on what Thatcher referred to as, “the corrosive and corrupting effects of socialism.” As far as I can tell, only Conservative political objectives were prioritised – raising cash to pay for higher rate tax cuts and passing high-value and indispensable national assets into the private corporate sector (the American model promoted by Ronald Reagan). The questions of whether privatisations were of secure and lasting benefit to the nation’s people were barely considered.

Net proceeds to the UK economy from all privatisations are less than £100 billion, a sum wiped out many times over by subsidies and other financial breaks.

In 1993 Thatcher declared in her memoirs, “Privatization… was fundamental to improving Britain’s economic performance.” However, from 1983 onwards, throughout Thatcher’s entire leadership, national income fell, household incomes amongst lower social groups also fell considerably and unemployment rocketed. In fact, from the early 1980s and into the late 1990s, the UK’s rate of gross investment by business was one of the lowest in the OECD while, at the same time, financial and social inequality grew massively. Neither taxation, borrowing nor spending decreased. (Pelgrin, Schich and de Serres)

These, and many other well-publicised facts forcefully contradict Conservative Party propaganda that they are safe custodians of the British economy. (Albertson and Stepney)

So, that worked out well, Maggie!

That being said, not all privatisations have been badly conceived or executed. A few public services have been enhanced by private ownership. These tend to be set-ups with strong commercial impetus such as Telecoms, Steel and Freight. (What’s worked and what hasn’t)

Generally speaking, though, with rare exceptions, privatisation has not provided the promised benefits to either British society or the economy. (Brittan, 1984)

 The UK’s Privatisation Experiment: The passage of time permits a sober assessment (PDF). Overview summaries collected by the author, David Parker.

·   UK Privatisations in general: Florio 2002 – “Privatisation has had no noticeable effects in terms of trends in productivity, employment and price levels at the firm or sector levels after allowing for changes in technology and input prices, nor on GDP growth and productivity at the national level.” – “Our overall result…..[is]… that taxpayers suffered a loss of £14bn, but this was cancelled out by the equivalent transfer to shareholders. …. Apparently, far from being a “revolution”, the great divestiture was a reshuffling of relative positions of various agents, probably a regressive one, with a rather modest impact on aggregate economic efficiency.”

·   British Airports Authority (Privatised July 1987). Study Parker (1999) – “No evidence that privatisation had a significant effect on performance. Performance improvements were a continuation of a longer-term trend.”

·   Water and sewerage industry in England and Wales (privatised 1989). Study: Saal and Parker (2000, 2001) – “Privatisation led to no obvious rise in productivity or lower costs of production. Higher productivity and lower unit costs came when the regulatory price caps were tightened in 1995.”

·   Regional electricity companies in England and Wales. Study Pollitt and Domah (2001) –  “Privatisation did yield significant net social benefits, but these were unevenly distributed
across time and groups in society. The government gained £56m in sales proceeds and taxes, but consumers did not begin to gain until 2000. Producers benefited from large increases in after-tax profits.”

·    Electricity Generation – Newbery and Pollitt (1997) – “Labour productivity has more than doubled since 1990, mainly due to shedding labour. Real unit costs have declined.”

·    British Telecom (Privatised 1984) – Florio (2003) – “The rate of growth of output was higher before privatisation. Prices fell with business users and international calls the biggest gainers. There was evidence of capital for labour substitution, while R&D expenditures fell as a percentage of turnover. Operating profits were stable before and after privatisation and privatisation had little discernible effect on productivity trends before 1991 when the introduction of more competition and new regulatory pressures led to large gains.”

·    UK Steel (privatised 1988) – Parker and Wu (1998) Compared to other UK Steel producers – “A large improvement in relative performance occurred in the British steel industry before the privatisation. Privatisation was followed by a decline in relative performance.”

Subsidies: Shockingly, over the last 40 years, about £1 trillion (£93 billion a year currently) has been wasted supporting privately owned energy companies with very little return to UK citizens through taxation or levies. This figure does not include subsidising employees’ low pay through the welfare system. (British Corporate Welfare)

Is it any wonder the UK is now on the brink of economic collapse?

Additionally, in the last 10 years alone, more than £37 billion of reinvestment has been lost by paying substantial dividends to private shareholders.

And there’s more, in the energy sector, other private companies also continue to benefit from UK citizens’ generosity. Fossil fuel producers such as Shell, ExxonMobil, BP and Chevron enjoy subsidies in the region of £13 billion per annum, even though the current Conservative government denies providing any form of support. Lying comes easy to those who seek to control us. These same companies have made more than £60 trillion in pure profits over the last 40 years whilst also causing 71% of all damage to the Earth’s ecosystem. (Professor Aviel Verbruggen)

For comparative information, the shareholders of other UK privatised utilities also benefit from subsidies: The water companies, for example, have received almost £83 billion since 1989 (£57 billion in dividends plus £13 billion in direct subsidies plus £11 billion in debt write off).

It should be noted that New Labour’s tenure in Government failed to unravel the mess left by the Conservative Government’s privatisation bonanza and only added to future misery through yet more privatisations and stepping up Private Finance Initiatives etc.

Regulator: During early privatisations, the consensus amongst Conservative politicians seems to have been that the competitive market itself would provide adequate regulation. However, very much as an afterthought, when the whole privatisation project had already been “put to bed,” someone had the idea that a system of Regulatory Authorities might be the best way to stop companies from merging into giant monopolies because, then, they could do what they like beyond any political control. Perhaps, also, by setting up a bunch of regulators, obviously run by Conservative Party cronies, public suspicions that we had been ripped off would be assuaged.

Stephen Littlechild was appointed as the first Director General of Electricity Supply (DGES). One of his principal duties was to ensure “an orderly development of competition,” an obligation which, in itself, required establishing monopoly protections. This development was obviously attractive to private investors because in effect it protected their profits by allowing prices to remain high. Paradoxically, the rules do not allow competitors to compete at all, or at least not too aggressively.

Over the years, nothing much has changed. We have Regulators who are the only tenuous connection between the state and privatised industries but, sadly, their power to safeguard consumer interests remains extremely weak, or non-existent. (Regulation.org)

Finally, reflecting the Capitalist doctrine of competition, it must be true that a business model for privatisation is ill-conceived if an industry requires a Regulator to set the boundaries of its operation. Under Capitalism surely the Market will be the regulator. Or, is this principle of Capitalism per se, flawed?

The Energy Business: We are told that the business of supplying energy is complicated. It is not. It has a similar operating profile as any other business – raw materials are converted into a saleable commodity (in this case, energy) which is then transmitted to distribution centres and onwards through local networks to consumers.  Poor government leadership and toothless regulators have only complicated matters leading to a direct and bewildering impact on consumer pricing.

Firstly, it is total nonsense that any energy supplier can provide 100% renewable energy. It is a lie. As Professor Richard Murphy confirms, “All electricity from all generating sources is mixed together when it goes down the wires to our houses.” Secondly, the UK’s energy pricing structure is a rip-off. OFGEM sets the wholesale price using the most expensive electricity as the basis. In other words, very cheap electricity generated by renewables, hydro and nuclear is priced at the same amount as the most expensive which is currently gas. Thus gas generators make a profit and all the others make mega-profits!

If consumers had a real choice in the type of energy they want, most would choose renewables, especially as the true cost of supply is 1 10th of the “pooled” cost – £50 a month instead of £500 a month on average as it will be from April next year.

Thirdly, gas-producing companies are also making massive profits off the backs of UK consumers. UK territories produce 50% of our gas needs. Gas producers can sidestep wholesale delivery of cheap gas by selling it at inflated prices through the markets. Thus contributing to the energy bucket and keeping prices and profits extremely high. This won’t change until the cartel is broken.

Producers – Raw materials for the energy industry are currently produced in two ways: 1/ Fossil fuels such as oil, gas, coal and uranium are extracted from the Earth and transported by pipeline, road, rail or sea. 2/ Natural fuels such as wind, sea and solar energy etc. generate electricity at the point of source which is output directly into the distribution network. No conversion is required.

The British state no longer owns any part of any fossil fuel extraction company. Nevertheless, we pay upwards of £13.6 billion per annum in subsidies. To be clear, North Sea oil and gas are 98% privately owned (mostly internationally) with a nominal 2% owned, indirectly, by UK pension funds.

Conversion – Energyconversion in power plants only applies to fossil fuels used in making electricity. Raw materials are pumped or shovelled into one end of the plant where it is burned, or neutrons are split in a nuclear reactor, to generate electricity. Natural gas requires no conversion.

The British state does not own any energy generation infrastructure. All are privately owned.

Transmission – Electricity and gas are transmitted at volume to distribution points around the four territories of the UK. The National Grid is the main operator for both electricity and gas.

The British state does not own any transmission infrastructure. All are privately owned.

Distribution – From these facilities, energy is distributed locally to households and businesses through privately owned distribution companies such as Western Power Distribution and Northern Powergrid.

The British state does not own any distribution infrastructure. All are privately owned.

Supply – These are the guys who take care of packaging the products and selling them to end
users – British Gas, Bulb, OVO etc.

The British state does not own any supplier companies. All are privately owned.

Overview by Professor Richard Murphy (https://twitter.com/RichardJMurphy) [edited]

There is a dimension to this [energy crisis] which is not discussed at all and which is changing how domestic energy is priced in the UK. The rules are set by Ofgem, the government regulator. These prices are set to make matters as bad as possible for everyone except the energy companies.

What follows is a little technical. I have checked the facts with energy expert Mike Parr, to whom I am grateful, whilst accepting that all remaining errors are mine alone. Having said this I think all that follows is true.

It’s important to remember that the goal of energy regulation in the UK is to preserve the privatised energy ‘market’, whatever else is claimed. In essence, everything it does is meant to ensure that at least some of the companies engaged in this ‘market’ do not fail.

The way it sets energy prices reflects this. There are lots of ways to generate electricity in the UK – renewables, nuclear, coal, hydro and gas. Most are used, except coal, which is now only in emergency use.

The cost of generating electricity using these various methods varies greatly. For example, using gas at current spot market prices costs about £611 per megawatt-hour (MWh) right now. Other sources cost about £60/MWh for nuclear, £50/MWh hydro and in the range £50 to £140/MWh for on and offshore wind and PV. Those are big differences.

The electricity we actually get delivered to our houses is from a mix of all these sources. It is total nonsense, for example, that anyone supplies pure renewable electricity. All electricity from all generating sources is mixed together when it goes down the wires to our houses.

Bizarrely, however, that’s not how the price is set. The wholesale price of electricity in the UK is set on what is called a ‘marginal costing’ basis. This is much beloved by economists but is working against the interests of all consumers of fuel right now.

What it means is that the wholesale energy price is set so that the most expensive producer can make a profit from the sales they make in the wholesale energy market.

So, since gas produced electricity is the most expensive (and is likely to be so for a long time to come) its cost of manufacture plus a fair profit margin sets the wholesale price for all electricity, no matter how it is generated. What that means is that those producing electricity from gas can still make a profit and, as a result, stay in business at present. But what it also means is that the nuclear, hydro and renewables producers are being paid the price that the gas generators get. This makes no sense at all. For example, there is no “marginal cost of production” for wind and solar power: the wind and sun are free. In those cases, marginal costing is simply the wrong method to use.

That is also true of nuclear power, where the cost of production is based on the capital cost of the plant spread over its useful life. Again, a marginal costing basis for pricing makes no sense when the amount of variable input into the nuclear process is tiny.

The result is obvious: the profit in the nuclear and renewable producing companies, who usually make more than half of UK electricity, increases dramatically, and wholly unnecessarily when a marginal costing price setting model is used to suit (prop up) gas generators. I should, however, add a twist. Many renewable energy producers are already subject to contracts that essentially fix their prices, with the government already taking the risk on price variation. See https://lowcarboncontracts.uk.

Where these contracts exist, and where fixed price contracts guaranteed by the government exist with nuclear producers, the current excess profits arising between the much lower cost of renewables and nuclear production and the very high cost of gas production already flow to the government, a
little-known fact.

There is also a pricing problem in the gas market. The UK produces about half its gas needs, the rest is bought internationally. We can’t control that international price.

But the energy regulation system lets UK produced gas be sold at the international price for onward supply to UK consumers, again massively increasing the profits of UK gas producing companies wholly unnecessarily, and solely because of the pricing model used.

The talk is that a windfall tax could correct this. That, however, is to ignore the fact that much of the problems that we face have been created by dire regulation, and changing that regulation is also within the scope of government.

Suppose that regulation was changed. Instead of all producers (whether of gas or electricity) being paid the price of the highest cost supplier in their market they were instead paid their own fair marginal cost of production, including a reasonable profit margin.

Then presume that the energy regulator priced the onward supply of wholesale gas and electricity to the energy distribution companies based on the actual cost to produce (including fair profit) of the gas and electricity actually sold into the market each day.

I stress, that for much of the renewables sector and for nuclear this will not be hard to do because of the nature of the government price guarantees that are already in place.

For gas, simply mix internationally priced gas with UK produced gas at its fair price of production. That’s all that is required.

This would, though, require a change in the law. There would be yelling, screaming and shouting from some energy companies, despite what I have noted, and legal threats galore. These will need to be ignored for one straightforward reason. That’s because customers can no longer afford UK  energy prices.

All UK focussed energy companies are technically bust. There is no market left for the energy they produce, whether gas or electricity, at the prices currently being asked for it, at least without state aid.

In that case, the state can intervene to save these companies. I am sure a lawyer, somewhere, will see a chance to bring legal action to dispute that, but the reality is their chance of success might well be low.

If in doubt, the UK needs to declare this a national emergency with existing laws suspended since, as a matter of fact, it is a national emergency. And if we could do this sort of thing for Covid we could certainly do it now. END

Who owns them: The British state no longer owns any part of any extraction, conversion,
transmission, distribution or supply company.

82% of the entire UK national infrastructure industries (Transport, energy, water, communications etc.) are privately owned with over half of that number owned by overseas investors many of which are sovereign states. (OFT figures 2012)

Suppliers: Wholly privately owned by UK companies: None are producers.

Supplier

Total customers

Avro

40,000+

British Gas

11,000,000+

Bulb

1,500,000

Ecotricity

200,000+

Green Energy UK

20,000+

OVO

5,000,000

SSE

5,800,000

Utility Warehouse

600,000+

Owned in whole or in part by overseas states:

Producer/Supplier

Owned by

EDF

France

Green Network Energy

Italy

npower

Germany

Octopus Energy

UK/Australia

ScottishPower

Spain

Shell Energy

UK/Holland

 (We own it)

Cartel: Energy supply in the UK is a cartel in which OFGEM is complicit. To begin with, the Price Cap is not a cap on the price of energy. No, it is the maximum unit price chargeable by suppliers for energy. It is calculated on a cost-plus basis (the cost of supply plus an amount for suppliers’ profit). So, no matter how unaffordable electricity generated by a particularly high-value fuel is to customers, energy generators feel no obligation to develop alternative and cheaper supplies such as renewables. Instead, they forgo the opportunity to invest in the long-term future of their organisations in favour of short-term mega-profits. So, they go to the “market” which, as explained previously, sets the most expensive price across all types of energy generation.

It is not so much a cap on the price consumers pay but a price target to safeguard supplier profits.

Rather than protecting customers by ensuring bills are affordable, the Price Cap supports suppliers by guaranteeing a level playing field (but only for the operators/suppliers thus creating a virtual monopoly) and ensuring they can make good profits. With a safety net like that, no wonder investors flocked to get into the business (62 of them at the last count). As such, the companies that have gone broke must have been run by total idiots. Or, in the case of Bulb, by an idiot burger chef.

Energy dependency: 36% of the UK’s electricity generation is from gas, 16% from nuclear, 43% from renewable sources and 1.8% from coal. The remainder is from micro-generation sources. (The Department for Business, Energy and Industrial Strategy 2020 PDF)

About 50% of the UK’s gas comes from the North Sea. 33% is imported from Norway, 4% from Russia and the remaining 13% from Qatar, the US, the Netherlands, Sweden and Belgium.

For comparison, in 2020 fossil fuel imports from Russia to EU countries were made up of 39% gas, 23% oil and 46% coal.

Britain doesn’t rely that much on Russian fossil fuels. (Eurostat 2020)

Business energy poverty: Small and medium businesses cannot afford their bills either. Most are reporting a rise of 400% on projected 2023 energy contract prices. As a result, 53% of SMEs expect to shrink, stagnate or fold in the coming 12 months according to the Federation of Small Businesses (2022).

SMEs are by far the country’s biggest employer (17 million people), the outlook is appalling and will have a catastrophic effect not only on the economy but also on the fabric of society. As if COVID, BREXIT and an absent government weren’t enough! (Begbies Traynor Group) (The Insolvency Service)

SMEs employ 16.3 million people (61% of the total) and generate annual revenues above £2.3 trillion (52% of the total). In Q2 of this year, there are 20,200 fewer SME businesses than there were last year.

Household energy poverty: For Scotland, Ireland, Wales and England, Fuel poverty is defined as having to spend more than 10% of household income (including housing benefits) on all household energy use to maintain a satisfactory heating regime as defined by the World Health Organisation*

* Households with older people or people with disabilities or chronic illness – 23°C in the living room and 18°C in other rooms, to be achieved for 16 hours in every 24. For other households – 21°C in the living room and 18°C in other rooms for a period of 9 hours in every 24 (or 16 in 24 over the weekend).

From October 2022 an average annual bill will be £3,549. The household income required to stay out of the WHO consensus on Energy Poverty is approximately £47,000 per annum.* At least 60% of all UK households will be in fuel poverty.

The expected average annual bill from January 2023 will be £4,266. To avoid Energy Poverty, the required household income will need to be approximately £59,000 per annum.* At least 80% of all UK households will be in fuel poverty.

If the average annual bill reaches £5,300 as many analysts believe it might in January 2023, the household income required to avoid Energy Poverty rises to £80,000* a year. 88% of all UK
households will be in fuel poverty. Shameful.

* Before tax and National Insurance (only) have been deducted. Individual circumstances may vary this amount, but not by much.

Where expenditure on all household energy exceeds 20% of income, households are defined as being in severe energy poverty. Although the English government has complicated the detail of the calculation, the bottom line figure remains essentially the same. (European Commission, DG Energy)

Calculators used: Tax and net income: Money Saving Expert   Household incomes and percentages: Ethnicity and ONS    Price Cap: Cornwall Insight and OFGEM

Price Cap history:

January 2019: £1137

August 2019: £1179

February 2020: £1042

February 2021: £1138

August 2021: £1277

April 2022: £1971

October 2022: £3549

Cornwall Insight said on 9 August 2022 that it expects the energy Price Cap to reach £4,266 a year in January 2023, for an average 3-bedroom household.

Current forecasts by other analysts suggest an increase in January 2023 to £5,300 a year.

Household finances snapshot in March 2021: 45% of all households (12.51 million out of 27.8 million) have income below the national average of £31,400 a year.

78% of all households (21.962 million) have income below £60,000 a year.

88% of all households (24.5 million) have income below £80,000 a year.

Average energy usage for a UK household: Typical Domestic Consumption Values (TDCVs), calculated by OFGEM. The medium range is, for example, representative of an average 3-bedroom home with 2/3 people and with standard insulation and amenities.

Gas: Consumption rate in kWh per annum

Low                      8000 – 10000

Medium              12000 – 15000

High                     17000 – 21000

Average gas usage per household works out at 12000kWh per annum and increases by roughly 2200kWh per annum for each extra bedroom.

Electricity: Consumption rate in kWh per annum

Low                      1800 – 2400

Medium              2900 – 4200

High                     4300 – 7100

Average electricity usage per household works out at 3500kWh per annum and increases by roughly 350kWh per annum for each extra bedroom.

OFGEM figures broadly concur with EFUS 2017.

Industries critical to sustaining life quality: Transport, energy, water, communications, housing, food, emergency services, healthcare . . . under the umbrella of homeland security (National Cyber Security Centre)    National Infrastructure Delivery Plan 2016 to 2021

Quality of Life surveys: The UK appears in the top ten on none of them.

United Nations Human Development Index 2020: Despite its more academic name, the United Nations Human Development Index tracks many of the same factors as most other Quality of Life or Standard of Living measures. However, while many surveys are based upon exactly that – surveys – the UNHDI is based more on empirical data such as life expectancy, years of schooling, and GNI per capita. Nonetheless, many of the same countries appear in the top 10.

1/ Norway

2/ Ireland

3/ Switzerland

4/ Hong Kong (China)

5/ Iceland

6/ Germany

7/ Sweden

8/ Australia

9/ Netherlands

10/ Denmark

Numbeo Index 2021: One of the most comprehensive equations is Numbeo’s Quality of Life Index, which measures eight indices: purchasing power (including rent), safety, health care, cost of living, property price to income ratio, traffic commute time, pollution, and climate.

Purchasing power, cost of living, and property price to income ratio are all measures of the average citizen’s financial wherewithal in a country, which connects directly to the standard of living. Traffic Commute Time is self-explanatory but vital (as any commuter will testify).

1/ Switzerland

2/ Denmark

3/ Netherlands

4/ Finland

5/ Australia

6/ Iceland

7/ Austria

8/ Germany

9/ New Zealand10/Luxembourg

Back to You can’t eat a credit score


© Rod McRiven 2022

%d bloggers like this: