Helping customers manage the risk of energy prices over the longer term

  • Customers may not have confidence that suppliers would still be around to deliver in ten years time.
  • It gets quite difficult for suppliers to hedge that far out.
  • If suppliers include exit fees in their tariffs, customers may not want to be locked in with one supplier for that long, perhaps fearing that it eliminates the incentive for the supplier to offer continued good service.
  • Alternatively, if the supplier doesn’t charge any exit fee, they are effectively offering a ten year option on energy prices. This will have a cost.
  • Those customers that are most vulnerable to price rises might not be able to enter into a long term contract, or might find themselves being locked into a bad deal.
  • Is 10 years the right duration?
  • Should a customer be compensated for the volume they actually use, the volume they are expected to use, or a quantity that is fixed up front? The former has the advantage of simplicity, but reduces the customer’s incentive to respond when prices are high. If there was a way to agree a quantity up front that would be my preference. It might also make sense to just compensate up to a maximum annual quantity.
  • Should customers be required to take part? For example, if a customer has solar panels, they are effectively hedging already, and might not want the government to hedge even more. If we are compensating based on expected use, then a customer with solar panels would use less so would automatically be opted out. But if a customer was just speculating that prices would come down, would the state still have a moral obligation to look after them if they got it wrong?
  • What about the variation in when, in the year, the customer uses the energy? For example, a customer with solar panels may buy all their energy in winter. Will the standard compensation calculation be appropriate for them?
  • Should the compensation be tied to some combination of baseload and peak futures contracts, or something more closely aligned with expected customer demand?
  • Should the compensation calculation be at an annual level, or more granular? You could have the scheme pay more in winter when prices are higher, reducing the need for retails to overcharge in summer and undercharge in winter.

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Fascinated by what makes societies and markets work, especially in sustainable energy. http://guylipman.com. Views not necessarily reflect those of my employer.

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Guy Lipman

Guy Lipman

Fascinated by what makes societies and markets work, especially in sustainable energy. http://guylipman.com. Views not necessarily reflect those of my employer.

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