Energy suppliers provide energy, not social security. Let’s keep it that way.

The government has been acting threateningly toward the energy suppliers over the past few days. Unless they donate more to consumers in fuel poverty (a household is in ‘fuel poverty’ when it spends more than 10% of its income on energy), the suppliers may face a windfall tax.

There is a feeling that the suppliers have been swindling customers by holding retail prices high while wholesale prices are low. It is possible that some of the recent bumper profits were generated at certain points in 2007 where the wholesale price dropped ahead of the retail price. This is normal – retail energy prices lag wholesale prices, so when the wholesale price drops suppliers profit; when it rises they lose out. As a trend, wholesale prices over the past 12 months have been rising and are almost certain to continue doing so during 2008.

Equity markets understand these ups and downs and the capitalisation of listed suppliers was indifferent to the high profits. The only real windfall the suppliers made over the past year was passing the market price of freely allocated EUAs on to their customers.

The government is using a temporary profitable situation to hold energy suppliers responsible for increasing fuel poverty – which is of course driven by rising wholesale prices. Demanding that suppliers address a social security issue will lead to a poorly designed cross-subsidy from wealthier customers, who would fund the fuel poverty contributions through their bills.

What is strange is that the suppliers’ response is that they need their windfall to invest in clean generation technology – tacitly accepting that they have made an unreasonable profit. Perhaps they feel this message play well with the public. Or perhaps they are trying to keep the debate focused on the relative directions of retail and wholesale prices, rather than that tricky EUA question.

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