How To Stop German Utilities From Ripping Off Costumers

One very strange aspect of the discussion on the costs of renewable energy in Germany is that people are actually worrying about prices falling at the wholesale level, as discussed in this earlier post titled “Weird: Germans Worry About Lower Electricity Prices.”

This is difficult to understand. I am pretty sure German Environment minister Peter Altmaier doesn’t understand it. I am not sure I understand it completely myself. So let me try to clarify with an example. All numbers in that example are set randomly for convenience.

Assume a model market with 100 TWh a year of electricity consumption, all of it sold over the whole-sale market. Assume they have a feed-in tariff system like the German model, where the amount of the surcharge depends on wholesale prices. Assume that wholesale prices are at 5 cents in 2012 and will drop to 4 cents average in 2013. Assume that in both years renewable energy in the feed-in tariff contributes 25%. Finally, assume that the average differential cost (difference between the feed-in tariff and the  wholesale price) is 15 in 2012.

It follows that differential cost will go up to 16 cents in 2013 because wholesale prices go down 1 cent. That adds 25 billion cents (EUR 250 million) to the feed-in tariff differential cost.

But note that the same 1 cent reduction in wholesale prices reduces the cost for buying the 100 TWh by 100 billion cents (EUR 1 billion). In other words, in a model where all electricity is sold over the wholesale market, the cost-reducing effect is larger than the increase in feed-in tariff costs.

For the very least, as long as all renewable energy is sold at the wholesale market, as it is now in Germany, the cost-reducing effect will be at least as large as the cost increase in the feed-in tariff. It may be substantially larger.

I have discussed the above point partly to show that these questions are complicated. The average household consumer can’t necessary be counted on to understand them correctly.

That of course means that German utilities can be firmly counted on to use the confusion for the purpose of ripping off their costumers. They will ask for higher prices, pointing to increases in the feed-in tariff, and won’t mention that their costs have gone down at least as much as the increase in question.

This has to stop.

The simplest way to stop it is to require by law that all utilities show their real price and stop confusing the consumer.

I recall the excellent documentary film by Frank Faranski on the German energy shift. From around 51:30 in the Youtube video, he discusses utilities. And one utility manager he interviews is CEO Christeck of Care Energy (interview starts around 53.30.

Their pricing model is to sell their costumers electricity at largely what they pay themselves. They buy electricity at 19.80 cent and sell it at 19.90, and their margin comes mostly from a basic tariff of EUR 6.99 per month. They also keep their costs much lower than the big utilities.

Care Energy would just pass on both cheaper wholesale prices and higher surcharges. They would not rip off their costumers.

Taking a hint from that, here is a simple solution for stopping this ripoff. Require that all utilities clearly display three numbers in their pricing information: Monthly basic  price, margin on each kWh (0.10 cents in the case of Care Energy), and final price per kWh.

Also, have a certified public accountant check this pricing information for any funny business once a year.

If this simple change happened, a dishonest utility that wants to pass on higher surcharges while keeping the lower wholesale cost for themselves would have a much more difficult job in the task involved of keeping their costumers from understanding what is going on. If they are required to disclose their margin on each kWh, costumers might ask why exactly that margin needs to go up exactly when the surcharges go up.

The beauty of this proposal is that it is very hard to argue against honest disclosure. Giving the costumer easily understandable information is something you can only oppose if you have dishonest goals, which no one will want to admit.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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