Caroline Flint’s gift to hedge funds

A highlight of the Party Conference season was Labour leader Ed Miliband’s promise to freeze energy prices for 20 months.  Now in a radio interview his shadow minister for energy Caroline Flint has told us more.  There will be a freeze, regardless of what wholesale prices do and that’s OK because the energy companies contract for their supplies 2 years ahead anyway.

Oh, erm, right.  Yes, there is a market for energy futures, and energy companies use it (though just contracting everything with a fixed time window would not merely defeat the purpose, it would leave no flexibility to respond to demand issues such as a cold spell).  So too do pure speculators who contribute nothing of value but who, free of constraints like the need to supply energy to real customers, have the flexibility to exploit whatever market trends might constrain and force the hands of real users.

Who is going to take advantage?  It’s the nimble and flexible.  Private individuals may get in on the act, but the big players who will really call the shots are the hedge funds.  Mr Miliband and Ms Flint have announced a huge gift to hedge funds!

There’s nothing hypothetical about that.  The banking crash of 2008/9 threw up similar opportunities for the nimble, and even as a complete rookie investor I was able to take advantage and trade bank shares at a profit.  Commodities are not so accessible to the little man, but professional investors are doubtless looking forward to it.

Nor is it just hedge funds.  There’s another class of passive speculator called ETFs (Exchange Traded Funds) that are, I believe, quite a lot bigger.  They are the very opposite to nimble: they must just follow the markets.  Whatever hedge funds do will automatically be magnified by ETFs.  They’ll make money on momentum and lose it when nimble hedge funds switch their positions, but their overall effect is to amplify the market movements that take advantage of our utilities’ positions being forced.

Meanwhile the losers will be the companies themselves, their less-nimble shareholders (from less-sophisticated individuals to sophisticated-but-constrained pension funds), and of course future energy supplies (though, to be fair, that last applies to politicians on all sides).  Above all, our suppliers are coerced into buying energy at artificially-inflated wholesale prices, so who will eventually pay for that?

I wonder what our utility companies are even now doing to prepare for the possibility of their market being rigged against them?  They’re always up against the hedgies up to a point, and now in addition they have one hand (two hands if Labour look like winning the next election) tied behind their back.  Nor can they afford to compete on pay for top hedgies to trade futures markets, though that at least is not necessarily a drawback.  Whatever they do, they’re now going to have to pay, in effect, an insurance premium against adverse market conditions out of their control.  And pass that cost on to consumers.

Posted on October 10, 2013, in energy, politics, uk. Bookmark the permalink. 3 Comments.

  1. Regarding your final comment, it looks like SSE’s got onto the act already.

  2. It’s been widely accepted among industry watchers, since shortly after privatisation, that National Power and Powergen (whatever they’re calling themselves nowadays) both systematically rig the short-term trading market for their own advantage. (See this old post of mine for a brief primer in the “how”.) If all wholesale trade is covered by long-term futures contracts, then they wouldn’t be able to do that any more. In terms of making market signals clearer, it might actually be an improvement – because it will get rid of a significant source of noise in the signal.

    Policy wise, I’m always in favour of raising energy prices, as it’s the most direct and effective way to encourage efficiency. It’s a shame that hedge funds get to do so well out of it, but that’s capitalism for you: every change is an opportunity for some heartless bastard to get ahead at the expense of society at large.

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