who's correct with electric company rpi increase...in there quote.

[Gavin A]

I was having a chat with my dad about this last night (Professor of Combustion Engineering) who's been running 2 CPD courses of the last 2 weeks with representatives of several of the major power companies, and all of them were basically saying the same thing - that the power producers are going to hold the government to ransom this summer in the build up to this coming winter, with most of the coal plants originally due to close in 2016 stopping production entirely in April this year to beat the new carbon tax the government has imposed on them from that point (they had 20,000 total operating hours allowed between 2008? and 2016, so they've mostly just brought these hours forward and used them up before the tax kicked in), with apparently several new gas plants basically pretty much built but not being connected until the electricity price rises significantly to justify their connection.

Essentially the government is either going to have to revoke the implementation of a long standing EU regulation to shut down these dirty coal plants, risking huge fines from Europe as well as huge compensation claims from the plants that have invested in the SO2 scrubbers etc needed to keep operating, or they're going to have to accept some pretty hefty electricity price rises this year in order to get that new gas generation that Osbourne loves so much actually connected and operating. One or the other, or possibly both need to happen before the winter of 2014 or the lights will go out and the government will fall. I've no idea if anyone at DECC actually understands this yet, or if they do whether ministers are actually listening to them instead of coming up with ludicrous schemes to attempt to bluff people into thinking that prices might be reduced if only the government talks tough enough on the issue.

My prediction is a 20% rise in electricity prices before next winter, and the government granting a temporary extension in hours to the coal plants that are due to shut to see us through next winter, then trying to pass the buck by blaming it all on Europe - remember when they do this that it's entirely their fault as they brought the tax in that's resulted directly in these plants bringing forward their closure dates by 2 years.

 

[FB.]

And my question to FB is.....Bearing in mind your financial analysis.....would you still instal your PV system given what you now know its capable of generating....

Definitely. My gross ROI (including bill savings) has been 18% @ 45p FiT. Net ROI has been 14%.
At 15p FiT and the higher price I paid for my installation, that becomes a gross 7% and a net 5% (including bill savings).
At current (lower) installation prices and the current (lower) Fit that becomes 9% gross and 7% net if I had an identical system installed at today's prices and with today's FiT rate.
.
Being inflation-linked, makes it even more attractive; it becomes an "escalating" payout (like a bank account with a guaranteed increase in the interest rate each year) - around 7% net at present, probably 8% net in three years time, 9% net in several years time, 10% net in ten years time - and probably around 14% net in the last years of the 20-year FiT agreement.
So take an average of 7% now and 14% in its final year, and call it an average return of 10-11% net over the whole system lifespan. Gross return could be 9% rising to 18% and may be seen by some of the luckier ones who don't need repairs or replacement.

Mine is a large array with no complex issues to affect its performance.
With smaller arrays, more complex, less-optimal-facing or partially shaded arrays there needs to be more careful consideration to ensure that the numbers add up.

 

[FB.]

This is exactly the sort of calculation the energy saving trust have done, and I disagree entirely with it. I think it's entirely unrealistic to even consider figures that assume zero inflation for the next 20 years, and presents a misleading picture as a result.

But such an exercise shows that the installation generates a satisfactory return straight away. No need to hope and pray that FiT payouts and electricity prices increase by a certain amount in order to justify the cost.
I don't like "investments" which start life in a cashflow negative situation, since it leaves too much to "luck" and to variable and unknowable future occurrences.
It was the reason I (we) sold our BTL in 2006; the rental income did not even cover the interest cost on the mortgage of BTL's at that time. Newcomers to the market would depend on unknown future price rises to make any profit.
People in 1999 thought that shares would go up 10-15% per year forever. Quite the opposite happened. People in 2006 thought that houses would go up 10% forever. They were disappointed too.

But I agree that utility bills and inflation look set to continue squeezing households in coming years.
If I had to guess, I'd say FiT rates would increase by 3.5% per year, and electricity prices by 6.5% per year, on average, for the next several years.
.
Data going back several decades shows both RPI and electricity prices in the UK rising at around 4% annually, although electricity prices have sometimes gone down or remained unchanged for several years at a time, followed by periodic big jumps. My unit price for electricity increased by 7% in 2012 (from 11.7p to 12.5p). It didn't change at all in 2011.

 

[Gavin A]

historic comparisons of electricity prices going any further back than about 7 years - the point we started becoming a net gas importer for the first time - are entirely meaningless / misleading. We're in a new electricity price paradigm now.

re RPI - you're a knowledgable invester who's well able to compare the relative advantages of different types of investment, but that's not the case for 95% or so of the public. IMO we should have a lot more expertise to bring to bear on estimating future electricity and RPI inflation rates than the public and should be making realistic best guess estimates for them that we're able to justify, to allow them to make a better informed comparison between leaving it depreciating in the bank vs investing it in something that will probably give them in the region of a 10%+ average annual return over a 20 year period even if writing off the cost of the equipment, and could well give them a much better return if energy prices do rise by anything like the sorts of figures I'm now thinking are actually likely in coming years.

I certainly think the EST should have been doing this as it's really their role to offer some sort of proper guidance on this rather than wimping out and giving the entirely misleading impression about the returns that they've done for the last year - which in large part has led to the levels of confusion in the market that we've seen, as the same figures were then used by Which and various newspapers.

 

[FB.]

I certainly think the EST should have been doing this as it's really their role to offer some sort of proper guidance on this rather than wimping out and giving the entirely misleading impression about the returns that they've done for the last year - which in large part has led to the levels of confusion in the market that we've seen, as the same figures were then used by Which and various newspapers.

I agree that "Which?" were very wrong to compare solar with cash, since they did not include any mention of inflation "because it is un-knowable".
However, "Which?" could have offered what's known as "real terms" (adjusted for inflation) number.

The 7% net annual return number I quote is the "real" rate of return including a fair allowance for depreciation (repairs/replacement).
The real net return on cash is currently zero; the best interest rates merely matching the loss of purchasing power due to inflation.

"Which?" should really have said:
"The real return from cash is currently roughly zero, and the real return from solar is currently around 7%".

 

[Gavin A]

I realise that you'd automatically convert it to real terms, but if banks etc aren't giving their interest rates in real terms, and this is what our customers will compare it to, then it makes no sense for us to be giving customers our rates in real terms to compare with rates that aren't in real terms.

I think that'd be what's commonly know as shooting ourselves in the foot.

 

[The Solar King]

I think Gavin's analysis is insightful and reasonable. I have re-posted some of the content elsewhere to see what reaction I get offering to take one shilling bets from anyone who disagrees with a 20% rise.

Will DECC have briefed their political masters on this rosy scenario?

More importantly, as an industry, we must ensure we are seen as part of the solution, not the problem. Whilst it brings grid parity closer more quickly, increasing viability at all scales, it could also be a real threat. It will see yet another round from the detractors of renewables blaming the increases on subsidies, (whilst ignoring those for fossil fuels in forms such as tax breaks, EMR changes etc). This will be despite the fact the proportion of a consumers bill funding renewables will have fallen. The climate change deniers like Messrs Lawson and Delingpole will be wheeled out and given yet more unjustified air time. It will bring nuclear in to the picture more forcefully. It could also play in to the hands of those in the Treasury close to Mr Osborne. There is likely to be high levels of mis-information and prejudicial comment from those who will profit from the situation and need to retain the energy status-quo.

It will be important to read this right, and not just be reactive.

 

[Vegelen]

Any Mystic Megs out there with a large crystal ball, that could tell us what the annuallised inflationary rate for electricity price rises will be for the next 20 - 25 years?

 

[Gavin A]

I think Gavin's analysis is insightful and reasonable. I have re-posted some of the content elsewhere to see what reaction I get offering to take one shilling bets from anyone who disagrees with a 20% rise.

Will DECC have briefed their political masters on this rosy scenario?

More importantly, as an industry, we must ensure we are seen as part of the solution, not the problem. Whilst it brings grid parity closer more quickly, increasing viability at all scales, it could also be a real threat. It will see yet another round from the detractors of renewables blaming the increases on subsidies, (whilst ignoring those for fossil fuels in forms such as tax breaks, EMR changes etc). This will be despite the fact the proportion of a consumers bill funding renewables will have fallen. The climate change deniers like Messrs Lawson and Delingpole will be wheeled out and given yet more unjustified air time. It will bring nuclear in to the picture more forcefully. It could also play in to the hands of those in the Treasury close to Mr Osborne. There is likely to be high levels of mis-information and prejudicial comment from those who will profit from the situation and need to retain the energy status-quo.

It will be important to read this right, and not just be reactive.

yep, I reckon we need to be proactive with this in terms of actually predicting the likely rise to come this year and ensuring the blame is correctly assigned for it in the public mindset well in advance so the politicians can't use renewables as a scapegoat (though as I say, I suspect it will all be Europe or labours fault this time, not Ozzies, as it's never his fault.)

I've started writing all this up into a blog post with graphs and stuff.

 

[FB.]

Any Mystic Megs out there with a large crystal ball, that could tell us what the annuallised inflationary rate for electricity price rises will be for the next 20 - 25 years?

The best guess we can make, is to assume that "the more things change, the more they stay the same" or to assume that "history may not repeat, but it does tend to rhyme".
Therefore, the best guess going forward is to assume something similar to the multi-decade trend which led up to the present time. Inflation around 4% and electricity price inflation about the same but with bigger ups and downs along the way.

But similar to the "uncertainty" over inflation and electricity prices, there's "uncertainty" over what interest rates will be.
Will interest rates remain close to zero for the next twenty years, or will the pick up again?
In past inflationary periods, interest rates have at times gone ballistic - perhaps they will do again, and perhaps the future will offer surprisingly high "return on investment" for people holding cash. In the 1980's and 1990's, interest rates were generally well above inflation, so there was a positive *real* return.

On balance, and for the sake of fairness to the customer, I think that when making a 20-year forward projection, it is best to use long-term historic trends (+4% per year).
But of course the temptation will always be for the figures to be nudged to be as high as possible.
The higher the rate of projected inflation, the greater the "profit" the customer can be shown.
The company with the wildest exaggeration of inflation expectations therefore quotes the highest return on investment, quickest payback or highest total payback, so slightly tilts the odds in their favour for winning the contract.

It's a difficult problem, but as far as I'm concerned: "a bird in the hand is worth two in the bush" - so a decent payback percentage in year one is far more important than dreaming of how rich I might get in twenty years time but which requires all the stars come into alignment as per the original assumptions.
Just a couple of percent "drift" in the actual v expected annual inflation can make a vast difference over twenty years.
7% annual return on £1000 makes a total of £3869 after twenty years.
10.5% annual return becomes £7366 after twenty years - almost twofold difference in total "payback" for only a 3.5% difference in assumptions.

 

[FB.]

I reckon we need to be proactive with this in terms of actually predicting the likely rise to come this year

Have you considered "subscribing" to email feeds of utility company press releases, via their investor relations web pages?
Also the London Stock Exchange newsfeeds.

This would give an "ear to the ground" of what's going on at those companies. Most provide quarterly or half-yearly "trading updates" and "outlooks" which give an idea of what they're experiencing (costs, profits, trends) and what they intend to do about it.

London Stock Exchange newsfeed "regulatory new service" is here (just change to whatever company you want to search press releases for):
Regulatory - London Stock Exchange

Centrica investor relations:
Centrica plc - Investors

SSE investor relations:
SSE - Investors

National Grid investor relations:
National Grid:

-

 

[Gavin A]

tbh I prefer to hear it from the coal face to find out what's actually going on rather than what they put out for public consumption, particularly as it avoids having to plough through 80 odd pages of corporate waffle and having to read between the lines in order to find out what I can get over a pint with my mate who works in the control room at Ferrybridge, or via my dad's contacts in the power generation sector etc.

The SSE report though does back up everything I've been saying, though it fails to draw the logical conclusion from it all as that'd not be very politically expedient for them to spell out.

Output from gas-fired power stations down 71.0%; from coal-fired stations up 41.5%

With high gas prices and low spark spreads for gas generation, SSE used the portfolio diversity provided by its coal plants to ensure lowest possible cost power generation for its customers.
While this results in a short term increase in emissions SSE remains on track to halve its carbon
intensity by 2020 supported by:<snip>
reducing output from coal plants as they use up their allocated running hours under the
EU’s Industrial Emissions Directive.

From 2013, all of the CO2 emissions permits for electricity producers will be auctioned. Moreover, the UK government’s introduction of the carbon price floor provides a clear market
signal for investment in low carbon and carbon sequestration investments. Plans for the
introduction of a ‘floor’ for the price of allowances in the electricity sector will result in an
effective carbon price of £16/tonne in 2013, rising to around £30/tonne in 2020 (in 2009
prices).

translation, sod paying that tax, we're just using up all our remaining hours at that half of Ferrybridge before they can tax us, and we'll go back to burning gas after April when we're shutting that half of Ferrybridge down, as long as prices rise sufficiently, unless the government does a massive u turn to keep the lights on and prices down, in which case we'll keep burning the coal as long as they'll let us... but we're not going to tell anyone that's what we're doing as that would spoil the surprise the industry has cooked up for DECC.

• technical characteristics and efficiency of its existing coal fired stations; • current lack of breadth and depth in the biomass supply market;
• volumes of fuel required for large scale biomass conversion; and
• requirement for involvement in the upstream fuel supply market.

translation - DRAX got there first and bought all the spare biomass around the world and we can't find any, and also we've realised that we can't just reuse our existing coal stores as the biomass spontaneously catches fire in them, and we can't really figure out how to burn it properly either and erm basically we know sod all about growing and harvesting wood.



but yes, it's worth checking out the corporate speak version of the story every so often to dig out the facts and figures, and see what line they're taking officially etc.

 

[Gavin A]

lol - I like this gem of a fixed price deal from SSE

We’re guaranteeing our prices won’t increase until at least second half of 2013

prices hardly ever go up in the first half of the year, they go up in the 2nd half of the year in the run up to winter as the suppliers buy their winter fuel supplies and work out what prices they will be paying and what the fuel mix is going to be for the peak winter demand etc.

It's the price rises in the 3rd and 4th quarters of this year that are of concern.

Actually, this is more fun than I expected it to be.

http://www.sse.com/uploadedFiles/Co...ults/SSEHalfYearResults201213presentation.pdf

 

[The Solar King]

If you want further evidence of where prices may go, have a look at the international comparisons in the DECC quarterly review of Energy Prices:

Quarterly energy prices - Department of Energy and Climate Change

Before tax we are currently paying a lot less for gas and electricity. Falling North Sea supplies will internationalise our costs, pushing the median price higher at the same time. In a different thread Worcester has pointed out how much more the Germans are currently paying.

 

[Gavin A]

It is a reasonable indication of where prices are likely to be heading once we're having to buy the vast majority of our gas on the world market, although Germany gets the majority from Russia and Norway, whereas we get more from LNG from Quatar than we do from Norway, and barely any from Russia. Last I looked, Germany was at about double our domestic electricity prices and 30% or so higher for industrial users.

One key point in all this is that at some point on these price rises renewables stop adding to the prices rises and actually start helping to level the prices off, whereas fossil fuel generation is likely to be on a steep upward price trajectory pretty much for ever (give or take a few temporary swings around that trend). Maybe less so for unabated, none scrubbed coal, but I'm hoping that argument has actually been won about that being a false economy.