Tuesday 12 November 2013

Political Attacks on the Big 6: Have A Care

It takes a brave man to defend the unlovely Big 6 energy suppliers these days - or a Telegraph comment-writer mindful of advertising revenues.  We don't see that kind of dosh at C@W, but there's still a case to be stated.

Particularly when we read crap like this from Ed Davey, trying to elbow out Milibean from the driver's seat on the bandwagon.
"[people] look at the big suppliers and they see a reflection of the greed that consumed the banks. So this is a 'Fred the Shred' moment for the industry. You deliver an essential public service, so your industry must serve the public"
Where to start ?  Firstly, yes, the ability to buy reliable and safe gas and electricity supplies in the home is essential.  The 'natural monopoly' aspects of this have long since been analysed out to be just the pipes and wires, the costing and pricing of which are heavily regulated and always have been.  The supply and commodity aspects (along with ancillary services such as meter-reading) are not natural monopolies, and have been 'contested' - i.e. subject to competition - in the residential sector in this country since around 1995 (gas) and 1998 (electricity).  The last Labour government finally dropped all price controls around the turn of the century.

They also regulated every other aspect of residential supply very closely, imposing no end of social obligations (such as not disconnecting elderly non-payers).  Indeed, they and their Coalition successors have been layering on ever more social obligations and 'green' surcharges with every passing year, culminating in the 'electricity market reforms' and the Heath-Robinson Energy Bill now inching its disreputable way through Parliament.  Is this 'good' regulation?  No, generally speaking it is not - but it is a far cry from the 'hands-off', light-touch, non-regulation (or at least non-enforcement) that was the Blair / Brown / Balls policy for the banks in the run-up to the 2007 crisis.

Undermining the operation of a proper market in residential supplies still further was the shocking failure to prevent the revival of vertical integration by acquisition, again on Brown's watch.  We've discussed this at huge length in comments here before.  Suffice for now to say that permitting Powergen (latterly E.on) to become the vertically integrated behemoth it became, followed by RWE and most recently EDF**, was a capital error - and I do mean capital: lots of it. 

(The scotties - SSE and Scottish Power - were of course privatised as verticals, and have jealously maintained their integrated structures. I exempt Centrica from all this because they achieved their 75% integration organically, not by acquisition - a very different thing - and it was done defensively, against the declining wholesale market liquidity engendered by the others.)    

No shortage of very pro-active regulation, then, albeit frequently crass.  Actually, rather a shortage of intelligent intervention, which should have been initiated by Ofgem to promote wholesale liquidity.  Their efforts have been protracted and pitifully lame,

The Big 6 must of course play the game under the ever more complex and often self-defeating rules they are faced with: and now to be turned upon by politicians of all parties is pretty rich.  I've no doubt that in many ways they haven't helped their own cause.  But, politicians beware! - because somewhere out on this uneven field of play is a cliff-edge.  Anyone who reads the papers will know that the UK is hoping for hundreds of billions of pounds of investment from these companies (and the National Grid, which raises almost all its revenues from them), to finance the comprehensive programme of power-plant replacement and grid upgrading required (a) to prevent the lights going out and (b) to deliver the monstrous 'decarbonisation' agenda.

It's well worth reading this piece from the Economist, which points out that as a consequence of the impositions and changes foisted upon them the market cap of the European power companies has fallen more than that of the banks (!!)  These are fast becoming companies whose balance sheets just will not support what is desired of them.  "Existential threat" is the phrase used by the Economist, and indeed RWE is arguably in a bed quite close to the door, with Iberdrola (Scottish Power) none to healthy either.  Imagine the reaction if Big 6 were to become Big 5 one fine morning: who'd be investing their billions the day after that ?

Meanwhile, back at the populist soap-box we have Ed Davey stirring things up instead of calming them down.  Ironically, on the same day we also have Cameron spouting this
Growth depends not just on Government policy but one wider social attitudes towards commercial success, he said. “We need a bigger and more prosperous private sector to generate wealth and pay for the public services we need. That means we need to support, reward and celebrate enterprise,” he said. “That requires a fundamental culture change in our country. A culture that’s on the side of those who work hard, that values that typically British, entrepreneurial, buccaneering spirit, and that rewards people with the ambition to make things, sell things and create jobs for others up and down the country.”
And that's the perverse political climate of double-think in which the Big 6 must go about their business.  Let's not imagine they won't one day, one way or another, respond quite badly to the kicking they get.

** remind me - was EDF's vertical integration in the UK achieved by acquiring British Energy ?   Oh yes indeed.  And was EDF advised by Gordon Brown's brother ?  Well, now you mention it ...


CP said...

A good piece to counter the mob's "popular wisdom".

The energy companies do seem hapless at PR though and having Angela Knight as their mouthpiece is terrible, I found her woeful when in defence of the banks in her previous job.

Ryan said...

Are they making huge profits?

Are their dividends huge?

Should I be buying their shares?

rwendland said...

I'm wondering if the uncertainty over how many new nuclear plants will be subsidised into being is hindering investment decisions on other kinds of new baseload plant. At present it seems very difficult to forecast overnight prices 15 years out; if much new nuclear is built it could be extremely low (though the nuclear providers know they will get £92+RPI inflation/MWh overnight whatever). I'd have thought this makes baseload investment decisions extremely tricky and risky.

I see that Forbes is reporting investment research firm Morningstar Inc analysts saying new nuclear is not a viable source of new power in the West. Massive shame the UK govt was lobbied into exactly the opposite.

Elby the Beserk said...

The sound of Angela Knight's voice alone (never mind what she says) makes me lose the will to live.

Excellent article, Nick. When I heard Davey on the radio early today banging on about how the energy suppliers mustn't treat customers as cash cows, my immediate reaction was - well, maybe if the government stopped doing the same with us, you might have a point. However, the reality is that all our money now belongs to the government, and what scraps we are left with we should be grateful for.

Sod 'em all. Davey makes my blood boil. And that he looks like a cousin to Wayne Rooney just makes it worse.

Nick Drew said...

Seems like unanimity on La Knight there ...

good question, Ryan - and unless you consider y'self an expert at calling the bottom (no, not another reference to Knight) I'd stick at the DD a while longer

could be very low, Mr W, if Germany is anything to go by: the more you introduce subsidised, very-low-SRMC plant into the fleet, the lower the wholesale price - but the higher the retail price !

kinda depends on the Capacity Mechanism details, as well

(and who expects baseload anyhow, apart from biomass subsidy-wallahs?)

Morningstar ought to be right - but you can at least try to suspend the laws of gravity for 35 years if you throw enough AAA-guarantees at it. I really hope the EC rides to our rescue, if HMG don't realise they've been duped in the meantime

you going all trenchant too now, Elby ?

DJK said...

Cameron's comments are entirely in character --- remember all that guff about work-life balance? Easy to say for someone who's never had to strive in life.

Anonymous said...

Pure hypocrisy, the chicken are coming home to roost. The power companies are doing what the govt asked them to do and the consequences are unpopular and an election is on the horizon.

Worse still, the price hike shows up the consequences of having no coherent policy and for 20 or more years of 'blame the lasts lot' and 'put off till the next election'. Our 'system' of government seems peculiarly unable to sustain a single sensible policy for more than five minutes. Any sane power company would demand a substantial premium before investing in such an uncertain marketplace. Westminster is an excess cost and an economic drag on the UK.

CityUnslicker said...

Roger they did, this is how we got to new nuclear in the end.

the Westminster cost is very high. Byt Milliband will be the next PM and he is a true beliver in both climate change and using everyone else's money to back his position. It will be a truly woeful state of affairs in 2015.

Clive said...

I'd be more willing to buy a "oh, this is really terrible, all this scattergun regulation is stymying us to the point of asphyxiation, we're just trying to make an honest buck and scarcely doing even that, it's not our fault it's the wholesale marker input costs, there's genuine competition in no way are we a cartel" etc. whinging from the Big 6.

They are businesses. If they are sitting on a declining asset (or perhaps better put, declining franchises) they can exit them.

Every day, companies decide that this- or that- market isn't worth their while anymore and cease participation. And look (if you can bear to look -- rail "privatisation" is the worse attempt ever at returning public ownership into private management, you struggle to work out even now what is "public" and what is "private") at rail franchising -- there's a litany of Train Operating Companies (TOCs) sending jingle mail back to the Department of Transport by handing back their franchises.

So, if the energy suppliers think that retail, commercial/bulk and/or generation isn't worth the bother, they can sell up, quit and generally shut up those shops.

While they continue to take the money though, I suspect that it's not quite as bad as they make it all out to be.

Nick Drew said...

Clive - fair point and a fair way of looking at the situation

but keep an eye on RWE (see today's announcements) because they may just test this to destruction

I suspect there are a couple of them who are playing the 'last man standing' game, as seen before now in (e.g.) the chemicals industry