Self-sufficiency steel? Ore? Coal, oil ... gas storage ..?

The old debate we often return to, has surfaced again a propos of steel manufacturing.  To what extent is self-sufficiency in strategic commodities and capabilities to be maintained?  Procured?  Or even desired?  Some have strong inclinations to one extreme or the other, whatever the prevailing circumstances.  I tend to say that there's no immutable answer, no formulaic way of "optimising".  War and peace are critical input variables: but also the key given fixed externalities.  China has no oil, as I once diplomatically reminded a Chinese commissar who had just scorned Europe's enthusiasm for electricity interconnection and stated that a nation should not rely on imports of such a vital resource.

In the here and now, I and many others would put primary steel manufacturing on the strategic side of the line.  Clearly, Starmer has taken the same view at Scunthorpe (though curiously unmoved by Port Talbot, as the Welsh Nats bitterly remind him and indeed by Grangemouth / SNP), leading others to note that those vital "raw materials" we were all on the edge of our seats waiting for ten days ago, came from, errr, elsewhere (abroad).

Then comes Nils Pratley, extending the debate to gas storage and specifically, Centrica's huge offshore Rough storage facility.  Pratley is usually quite sound, and here he sets out a reasonably balanced range of pros and cons.

Steel was a security risk. What about UK gas storage? The government refused to allow steel furnaces to be turned off. Should it be happy with just six days of stored gas?

So here we go again.  

Nobody could disagree that now and for many years to come, gas ticks the 'strategic necessity' box.  Since we ceased to be self-sufficient in natural gas in terms of production from our own territorial waters (the early 00's), without any government intervention or subsidy the miracles of the free market secured a healthily diverse range of import sources and facilities through which to convey them.  How so?  We've told this story before.  

Because the decline of indigenous production could be, and was, seen coming a mile off, demand remained strong, and the companies involved were themselves strong, capable and confident. And that's where we are: able (as the energy crisis of 2021-3 showed) to withstand remarkable buffeting from the global market, and still keep homes warm.  For sure, the cost of doing so [i.e. paying world prices] was to some extent socialised, but the means of doing so were free-market means.  

And all this happened without Rough, which had been "permanently shut down" (© Centrica 2017 et seq) some years before as being uneconomic to its owners, the Tory government having more than once declined to bail them out.  But lo!  Miraculously, it transpired Rough had not been permanently shut down, but merely mothballed, and was rapidly pressed back into service by Centrica to avail itself of the profitable opportunities presented by Putin's gas crisis.

See, here's the problem in this very particular case: Centrica has form as a would-be subsidy-farmer.  That's the trouble with going down the "strategic" road.  Just like "green" or any other government-favoured enthusiasm, once the subsidies are spotted, every man-jack starts greenwashing / strategy-washing or whatever.  It becomes very hard to disentangle what could be a respectable strategic case from their self-interested special-pleadings.  

Even in 2025, with that recent crisis experience in hand, for all the ticks that natural gas puts in the 'strategic necessity' box, I'm not sure Centrica should be indulged.

ND 

UK nuclear madness

Always remember what we said here a very long time ago: the whole point of France's nuclear policy is to get other nations to underwrite their astronomical nuclear liabilities.

This is precisely à propos of Mr W's prompting BTL here (he'll kindly correct any details that need correcting) ...

*   *   *   *   *

The Hinkley Point C / Sizewell C story so far:

When EDF (together with Centrica & later still the Chinese) acquired the old British Energy in 2008, they were immediately set on building more of their EPR design of nukes in the UK: HPC was nominated to be the first.  Recall that until after the 2005 GE, Blair was set against a nuke revival which he'd believed to be electoral anathema: but various voices** persuaded him it was a Good Idea.   EnSec at the time was of course ... Ed Miliband.  EDF had the effrontery to announce an HPC start-up date of 2017, and that it wouldn't require a penny-piece of subsidy - the latter line being official government policy up to and including the awful Chris Huhne (remember him?)  

Next milestone event was Fukushima 2011 which, to be fair, was outright force majeure and caused significant mods to be made to the design of the structure in which the EPR reactor would be housed.  OK, so the costs went up as a consequence.  But that was the last externality that EDF can truly be excused of: covid might just also creep in to the reckoning, but not inflation, their other bleat.

During the regime of Ed Davey - to be fair, egged on by that git George Osborne - suddenly EDF was going to get subsidised.  We have written about the awful HPC CfD contract many times here.  It has only one saving grace, on paper at least: project cost overruns are solely for the account of EDF / the Chinese (who've now buggered off) / Centrica.  But given the outrageous one-way changes subsequently made to the CfD in EDF's favour, at EDF's demand, even this is of little comfort.  The project overruns are horrendous; and we know EDF will hold a gun to HMG's head for outright cash subventions at some point.  (Personally I suspect this has already happened, disguised as SZC payments, see below.)

To repeat: once the Fukushima design changes were made, everything subsequently is down to EDF's monstrous incompetence.  EDF hints that UK regulators have kept tinkering unreasonably with new design demands, but remember: the CfD states that unless a new regulation could have reasonably been foreseen by EDF, the latter is indemnified against extra costs arising.  So we can put 'costly regulatory tinkering' out of our minds.

Fast-forward to SZC

EDF, of course, realised even before the ink was on the CfD (which they only signed because they thought Brexit would scupper the project altogether) that they couldn't carry out SZC on the terms explicitly for SZC itself that are actually contained in the HPC contract (i.e. for SZC as a put-option for EDF).  So they carefully played a lobbying game resulting in Boris agreeing to finance SZC on a US-style 'rate base' footing (i.e. underwritten directly by taxpayers) - and then, got HMG to stump up hard cash: a billion here, a couple more there ...  now the cash commitment has hit £11 bn of taxpayer money, rather than the usual 'stick it all on the electricity bill'.  AND - amazingly - although EDF has yet to take FID on SZC, the new reactor is already under construction in France, paid for by us.  FFS !  Talk about "too big to fail" ...

*   *   *   *   *  

So now we loop back to the very first line of this post.  Also, we should stew in the details of how badly in trouble HPC is, and how cash-strapped and liability-riddled EDF is in general; how much HMG needs French cooperation on the Boats issue; and the perennial suspicion the whole civil nuclear programme is there to underpin the military nukes ... and you have a recipe for an ongoing haemorrhage of taxpayers' cash that starts to look seriously injurious.  And in the middle of this, Miliband thinks he can get electricity bills down!

An appalling tale - egregious even by the standards of HMG cockups and nuclear age skullduggery.  I have nothing against nukes in principle: but in practice they just never add up.  If we wanted an SZC, let it be remembered that by far our best-performing nuke has been SZB.  We should have 'simply' (hah!) built an updated SZB. 

ND  

_____________

** including one G.Brown, brother of whom worked for, errrr, EDF

General - if you follow the tags, you'll find loads more C@W posts on these topics.

Thames Water: catastrophic downside

Asset-stripping is hardly new: but the first really big company to be terminally hollowed out by modern financial engineering was Enron (1987-2001).  The reason why it happened there, was completely the opposite of what's taken place at Thames Water.  Enron was chronically under-capitalised for conducting the business it was (very successfully) engaged in: giga-scale market-making in the energy sector, with attendant innovation and creativity that has been much missed in the sector since 2002 (sic) but never truly replicated.   Nostalgic laments aside, what Enron absolutely needed for its business model to be workable was to maintain investment grade credit status, because long-term dealmaking was its forte, and nobody[1] will do long term deals with a shaky counterparty.  

Why was maintaining credit status a problem?  Because (a) as an inevitable structural problem, cashflow lagged profit (which can be the death of literally any business, however sound);  (b) it couldn't borrow any more, which deprived it of the traditional solution to that issue; and (c) - the real killer - it was committed to perpetual expansion, it being traded on Wall Street as a growth stock[2].

This conundrum became fully apparent (to Enron itself: the rest of the world just gawped and invested) as early as 1993, when the financial engineering started.  For a few years there was ample opportunity to do some clever but wholly prudent stuff, resulting in a balance sheet that was a marvel of precise and efficient design.  However, by the end of the '90s what could be achieved by such elegant means was pretty much exhausted, and they started resorting to some deeply imprudent expedients, designed by Enron people who really knew what they were doing - and abetted by banks who should have known better - and could therefore build it very big and very bad.  (It didn't help that one of the main architects of all this was actually on the take in the literally criminal sense.)

*  *  *  *  *

Enough of history: it suffices that some potentially very dangerous financial technology had been designed and employed, able to be abused in completely different circumstances.  Enter highly capitalised Thames Water, with physical assets and guaranteed revenue streams galore; the most fertile ground imaginable for financial engineering - and ideal circumstances for gouging out all the cash and remitting it as dividend.  And so, it seems, they have.

How dangerous is this?  One might say: who remembers Enron now?  Didn't the lights stay on, and the waters close over?  Hopefully, optimistically, that's right: HMG has quietly resolved several seemingly vast corporate problems in the past, British Energy 2003 being perhaps the best example ("Nuclear Generator In Financial Meltdown" - never a comfortable headline).  With TW there appears to have been a bit of advance warning: and maybe with the recent 'rescue' of Bulb, some sensible generic thinking has already been done in government.  Maybe.  And Thames Water is squarely based on real assets.

But on the pessimistic side:

• how likely is sensible generic thinking, in advance, within HMG?
• Bulb's business model was trivial compared with Thames Water
• with British Energy, when it went under its product hadn't been forward-sold to any degree, but could be (and was[3]), for an instant and constructive boost to its finances
• the economy was in a much better state in 2003 to be standing behind any loose ends
• some types of financial engineering are pretty toxic 

Which brings us to the elephant in the room: TW has suckered in a range of serious international financial players.  OK - so, caveat emptor and leave them holding the keys?  That may be possible in strictly legal / contractual terms: and HMG probably has reserve powers to direct the continued operation of the assets.  But here's the thing: like any financial player, those big Canadian pension funds and Far East investors really, really hate being left holding the keys.  In those circumstances, they have literally no idea what to do next: we know this, because it's happened many times around the world. 

So what happens now.  In coalface terms, there are asset-oriented specialists like Macquarie and Cargill who know all about restructuring and bailout.  They'd make fortunes from the gig: but they know what to do.  Is that how HMG will play it?  It won't look good.

More widely however, what does this do for the future attractiveness of UK plc for inward investment?  We've long been the envy of the world for how easily we've attracted cheap foreign dosh, and a large part of the economy is now based on it.  Kick away TW, and what do all these people do with their next chunk of money?  Equally great and easily-executed opportunities elsewhere don't grow on trees - but there are plenty enough, not least with government-backed Net Zero projects sweeping the globe.

In short, the worst-case scenario is, in sequence: (a) a serious investment strike by otherwise UK-directed money; (b) downgrading of UK plc's credit rating, with all its inflationary and currency implications; (c) drying-up of deal flow for the City.

This could be Very Ugly Indeed.  All the more reason why HMG will step in smartly.  But what if TW is just the tip of the iceberg?  Where's, *ahem* Gordon Brown when we need him to Save The World?

ND

[1] Nobody with any brains, that is - though amazingly, some companies still do.

[2] Everyone in Enron was substantially paid in company paper - so the idea of letting the share price slip was anathema.

[3] Sold to a rapacious Centrica, as recounted here before.  They then got carried away and foolishly bought 20% of the nuclear portfolio when EDF bought the rest.  Has been doing them quite nicely just recently though, of course.

Rough Gas Storage: A Long, Odd Tale

I last wrote at length about the 'Rough' gas storage facility five years ago, and the story is taking another turn; so, once again by popular request ...

Many moons ago it was discovered by offshore operators (Amoco) that the 'Rough' gas field they'd developed in the North Sea had almost uniquely favourable reservoir geology.  The sandstone is incredibly regular, making it highly suitable for gas storage.  So, only a few years after commencing production, they sold it (at a very handsome price) to the old monopoly British Gas, which had decided it could use a mammoth offshore storage facility for seasonal storage (pump gas in during summer, pump it out in winter).

More: BG declared it was an absolute necessity, to support the heavily winter-biased demand of its residential customer base - the first of many porkies it has told in this tale.  Pre-privatisation, BG was, remarkably, an unregulated monopoly, though it was still liable to the occasional inquiry into its capital expenditures (which it was of course foisting on us captive customers): so it made a bit of a case for why Rough was essential.  I won't bore you with it now, not least because it turned out to be entirely spurious when, a decade later, the privatised BG was being split up and the division which handled BG's residential customer base - still a monopoly at that stage - was invited to bid for whatever capacity in Rough it required to meet customer demand.  It bid for ... precisely zero: yes, somehow when push came to shove Rough wasn't essential - it was in fact totally unnecessary.

Anyhow, in the meantime they'd spent around £1bn - quite a lot of money in the 1980s - on converting the offshore production facilities to be able to inject and withdraw gas at will, coupled with substantially upgraded onshore facilities for the same purpose.  When anyone tells you (as they often will) that essential utilities are too important to be in private ownership, and that monopolies are the right way to go for efficiently ensuring security of supply etc, remind them about Rough - and apply to me for yet more examples of grotesque monopoly gold-plating at our expense, because they are legion.

Well, the thing had had been built, so it was sunk costs by then.  No need to record the complex chain of transactions by which the facility was separated out from what became Centrica, passed through various hands, and eventually was bought back by Centrica to become part of their complex and quite cleverly managed portfolio.  (Just in case anyone thinks I have a down on Centrica, read back through the Centrica-tagged posts by clicking on the label below: you'll find I used to have a high regard for them.  It's their recent subsidy-farming manifestation I dislike.)  Suffice to say, Centrica ran Rough quite intelligently on an open-access commercial basis for many years.  Over time, seasonal storage (pump in for 180 summer days, then pump out across the winter period) became less attractive in the face of much more flexible new (and smaller) onshore gas storage facilities, plus increasing access to a big surfeit of storage capacity on the continent (another long story) via two big cross-channel pipelines, plus burgeoning LNG import capacity of a very flexible nature.  Even then, Centrica was able to respond with clever, more flexible storage packages which they delivered via use of Rough.

Eventually as the beast grew older, they needed to think about how long it would last.  There was a small explosion at one point, and other old-age mishaps.  Ten years or so ago, they started angling for government money, firstly to build more storage, then to bail them out at Rough itself.  They started spinning yarns about safety, and how much new drilling would be required to replace the old wells, and how only a subsidy would allow them to do this, and how we'd all freeze in winter if they closed it down.  They didn't convince anyone, so five years ago they shut it down, saying they would pump out the rather large amount of "cushion gas" - the minimum inventory a gas storage facility requires to operate at all - and that would be the end of it.  Amazingly enough, once again, it turned out that UK plc managed quite nicely without Rough, thank you very much.  The wonders of the free market, which was comfortably delivering all the necessary seasonal flexibility without any subsidy whatever.

More recently, Centrica somewhat unexpectedly started hinting that all might not be over at Rough.  First, they suggested it might be converted for CO2 storage ... then (as hydrogen started to become all the rage) for hydrogen storage - all somehow needing a big subsidy (because, of course, it's all totally uneconomic).  And there was everyone believing they'd pulled the plug forever / it was rickety and unsafe / etc etc.

Now ... it turns out they think they can press it back into service as a regular natural gas storage facility - by October!  FFS!  They've just obtained two of the permits they need to be able to do so - and, needless to say, are in intense negotiations with the ever-gullible Civil Service for what public money is going to be sent their way for coming to the rescue this winter, when Putin's punishment reaches its wintry worst.  Inventing a whole new rationale - a strategic reserve of gas (equivalent to a whole couple of days' worth to start with, maybe rising to 10 days' worth with a big refurb job.  10 days, just think ...)  Well, fair to say, times are different now. 

We can only hope someone in Whitehall is playing back to Centrica its bullshit statements of many years, and giving them a very hard time.  Somehow, though, I doubt it.

ND 

'Ask C@W': your energy questions

Nope, we're not setting up in competition with Martin Lewis: but a couple of BTLers have raised some specific energy questions of late, so here we go with another issue of the 'ask C@W' energy helpline. 

Won’t the lack of LNG landing terminals in Europe mean that the UK will be alright? If the gas can’t be physically landed in mainland Europe and the UK - Europe link only has so much capacity then won’t that mean lower gas prices through winter in the UK?  (Al)

Basically, yes, that's correct, although with absolute prices being sky-high whatever the physical sufficiency and price relativities, the definition of "will be alright" could be queried.  UK (also Spain) is well served with LNG regas capacity and both countries are enjoying lower wholesale gas prices than the continentals, exactly as market logic would predict.  Correspondingly & likewise, the UK is exporting as much gas as the pipelines to the continent can manage, based on that clear price differential.  There's every reason to assume this will continue through winter; including the exports unless things get so bad that HMG introduces rationing &/or export restrictions. 

This sufficiency of LNG capacity is a great free-market success story that we've written about before, contrasting with the dismal failure of central planners, particularly in Germany and, to some extent in France.  Italy ought to be better off, too, but local planning laws there are skewed 99% towards NIMBY considerations and generally fatal for building regas.

We're exporting a bucket load of power through interconnects to Europe. Wonder who is doing the checking and paperwork forms on the receiving side to make sure it is up to scratch?  (Sparky)

Same things as gas, with the added frisson for France that half their nukes are closed for safety reasons, pending regulatory review of their endemic corrosion problems (and of course cooling-water from shallow rivers being too warm in summer, as usual.)  Oh, and nobody gets hung up about import-export paperwork.  Ireland, utterly dependent on UK for energy trade, would grind to a halt in a day or two if anyone were to get sticky about that.  (I know what you're thinking ... Time to play hardball ..?)

What’s happening with Rough storage - are there any plans to commission it before winter?  (Al again)

Not a chance: it would take years.  I'll post a longer 'history of Rough' another time - it's a fascinating case study.  For now, we can say that Centrica, once big free-market advocates but latterly joining the ranks of the shameless subsidy-seekers, have been touting for government money and/or RAB approval for something, anything, to allow them to avoid writing off Rough and taking the big decommissioning hit - very expensive indeed.  Before Ukraine they were peddling an implausible scheme for using Rough to store hydrogen on a seasonal basis; and CO2 before that.  Needless to say, Putin's War being the latest headline grabber, it's now Centrica's latest roll of the dice.  Failing that, it'll be a proposal to convert it into an offshore Nightingale Hospital; or asylum-seeker detention centre, or something.  Anything.

They were such a laudable enterprise once.  

ND

Addendum:  anon asks BTL below - 

has Gazprom contracted to deliver any gas for this coming winter? If so, with whom? If they have contracted to do so, to what extent does it mitigate the risk of Russia’s deciding to turn off the taps?

Yes they have, in large quantities, to most of their traditional wholesale customers.  Some of the latter have courageously refused to play Putin's "pay in rubles" game (a meaningless trick in economic terms, designed only to humiliate) and been unilaterally cut off.  I am guessing Gazprom has made some utterly ludicrous legal claim they were 'in breach of that new (unilaterally imposed) payment term' - there are plenty of whore lawyers in Europe who'll frame the case for them - and will claim the contracts have thereby been terminated.  But the craven realistic ones in Germany, Italy et al who've knuckled under still have their contracts in place.  I've yet to learn how either side is treating Russia's big cut in Nord Stream 1 volumes: it's possible (being summer) that these haven't impacted on contractual volumes per se, but only the amounts coming forward for the spot market: in which case no contractual issues would arise.

The biggest importer, Germany's Uniper (heir to Ruhrgas), has brazenly and loudly stated that it fully intends to carry on importing for the many years its Gazprom contracts have still to run.  What it really means is, "until you pass a law to stop us - and compensate us, kindly don't forget the compensation".

Will Gazprom consider itself 'contractually bound' to deliver?  No!  They'll do exactly as they are told.  As a matter of history, Gazprom has actually been a very reliable supplier over the decades; was initially (i.e. when the invasion first started) very keen not to burn any contractual boats - not least because they wanted to keep their powder dry for a legal challenge to Germany's prompt kiboshing of Nord Stream 2; and is always punctilious in terms of talking the language of 'inviolable contracts blah blah'.  Pft.  Meaningless in today's circumstances.    

Addendum 2:  further Q&A has developed BTL.  And our learned friend Mr Wendland has pitched in, too. 

Energy Supply Carnage: Last Man Standing?

A very traditional business strategy, in sectors where for some reason corporate survival is by no means assured, is "last man standing". Just hang on while competitors go under or vacate the field, in the hope of cleaning up when there's nobody else left and the benefits of monopoly can be reaped.  Well, for a few years at least - until the competition authorities eventually forget how worried they once were.

The UK energy residential supply sector has offered the prospect of this for many years.  The comfortable days of the 'Big 6' - when the barriers to entry were so high that new entrants rarely stayed the course - were always likely to be under threat at some point, with chaotic fallout.  So what were those barriers?  

• Competence: gas may be a relatively easy business to participate in, but electricity is fiendishly difficult, in several dimensions, as many an apparently competent energy player has found to their cost (Shell, BP, Total, Statoil, Conoco, ...)
• Branding & trust (a.k.a. inertia): people were fairly well accustomed to, and comfortable with, buying from "the electricity board" (not realising the concept was otiose from the mid 90's, with the restructuring of the industry and the separation of the supply side from "the wires") 
• Low margins:  the business might have been comfortable for long-term incumbents, but fortunes were not readily made - indeed, once the market settled down after the initial upheavals of sector restructuring, there was always at least one of the Big 6 thinking seriously about jacking it in
• Capital adequacy:  at very least, in order to be able to hedge the commodity price risk (a very necessary requirement in circumstances of volatile wholesale prices), a basic minimum credit standing is required

This all speaks to energy supply being the preserve of relatively large, competent, well-financed companies.  Was a market of "only" six suppliers necessarily non-competitive?  There are many other sectors where six, competing properly, would be considered pretty good.  To be fair, it can be argued that the Big 6 'competed' in a rather nominal fashion, and did little actively to shake up the significant degree of customer inertia: but the acid test - the trajectory of prices for end-consumers - was broadly favourable, and had been ever since the market opened up.

The picture began to change about a decade ago when a number of aspects came together to facilitate participation by players with quite different business models.

• government and regulators were very keen indeed on seeing new entrants, and proved willing to ignore the kind of arrant dross that was applying for supply licences (interspersed with a handful of genuine and properly-financed innovators).
• for the same "reason" (presumably), Ofgem simply hasn't enforced its own rules on smaller players, e.g. the requirement to provide a telephone call-centre service to customers. 
• one of the major barriers to entry - the need for complex systems (again, particularly for the electricity side) ceased to be an issue with the advent of decent-quality off-the-peg supplier software packages at reasonable prices. 
• wholesale prices: they started on a multi-year trend of slowly falling.  This facilitates the "Northern Rock" trick: sell long (e.g. one-year contracts at fixed price), buy short (on the spot market, where because of the falling price-trend, it'll be cheaper than when you made the sale).  Buying spot requires minimal credit; which is, errrr, handy for companies that have almost none...
• the "flipping" model: price comparison firms that offered to switch customers "automatically" (i.e. passively, on the customer's part) onto the cheapest available tariff.  A supplier with next-to-zero marketing capabilty could thereby "buy" as much market share as it wanted, simply by pitching its prices accordingly.
• some of the social-policy costs levied on suppliers only apply to the larger players.

This helps explain how an inadequate company might be able to get into the energy supply game.  But why would they want to?  There is no single motive, but alongside some perfectly creditable intentions, others of them are very bad.

• genuine, albeit speculative profitability of the "Northern Rock" model - for just as long as wholesale prices continue to fall AND the supplier isn't going to the trouble and expense of hedging against the possibility of rising prices (not least, because it doesn't have the credit standing to do so! - see above).
• positive cashflow: notwithstanding various unavoidable start-up costs and system overheads, with a customer base once established the supplier is able to get ahead of supply-cost outgoings via (a) direct debit charges and "estimate"-based payments, i.e. borrowing its customers money; and (b) collecting, as it is required to do, ever-increasing "green" levies, which do not need forwarding to the relevant authorities until several months later (if indeed they are ever paid out at all) - another cheap source of "finance". 
• ease of syphoning off this cash: small players with no public profile nor recognisable corporate governance can readily and quietly play tricks like borrowing from Related Parties at outrageously high interest rates, "investing" in Related Party ventures, and paying Related Parties for extremely costly "software services" and "consultancy".  How do I know about this stuff?  Because sometimes it's as plain as day in their annual reports!  (That's for the supply firms that aren't so small, they don't have to file full accounts ...)  Where were the authorities in all this?  Evidently, neither Ofgem nor government could give a stuff.    

Until now, of course, when they are dropping like flies.  In the meantime, the Big 6 has ceased to exist!  SSE and National Power have exited: we are left with E.on (German), Scottish Power (Iberdola of Spain), good old Centrica, and of course EDF, probably only still in the game to give it political cover for its UK nuclear machinations.  True, Ovo and Octopus have stepped up to the plate: but then, so had Bulb - until last month ...

At least some of the current survivors will be hedged through to April-ish, when the prevailing energy price cap is scheduled to end (see earlier posts).  Of course, nobody will be making any positive plans whatever until the government has shown its hand on replacing the cap.  If it gets this wrong, chaos ensues, probably followed by de facto nationalisation in some shape or other (like the banks in 2009). 

But there must at least be the chance that Centrica's unwavering 25-year strategy of positioning itself to be the Last Man Standing finally pays off.  And a Happy New Year to all concerned!

ND

To Whom the (Energy) Spoils? A Genuine Puzzle

There's an interesting dynamic rumbling in the energy sector and associated financial elements, the dialectic of which is as follows:

1. We can't use fossil fuels in future, oh dear me no.  Perish the thought.  Put my pension into something else.  Let me believe that the ambulance runs on pixie-dust and electricity comes entirely from wind.  Don't allow any more production of North Sea oil & gas.  Make Shell's life hell if it even thinks about such a thing.  I might even start to feel very strongly about all this.
2. Actual disinvestment starts apace: actual pension funds switch out of fossil fuels by the billion.  For the BPs and Shells, the Centricas and even the EDFs (see below), the cost of capital starts to rise.  They actually sell some of, maybe all of, their hydrocarbon-related assets.  
3. But in the world outside of all those tightly-shut eyes & heads-in-sand, the ambulance still runs on diesel and electricity is still generated using fossil fuels.  
4. In fact, the market for fossil fuels right now is pretty tight (see previous post) AND, what with all this wind in the power fleet & other kinds of uncertainty, prices are exceptionally volatile.  They are likely to stay that way, even if in absolute terms they subside from today's level.
5. Some people are making a Great Deal of Money from this - right now.  And the scope for a great deal more to be made in the coming years is huge: particularly via assets (and managements) that are responsive enough to make hay from all that volatility - e.g. efficient & flexible gas-fired power units.  Even just the continued supply of simple gas to western consumers (whether the green-woke like it or not) has a lot of mileage still in it (at least two decades, I'm guessing).
6. But the 'traditional players' seem to feel themselves unable to make the usual response to an economic reductio ad absurdum, in terms of investment (long term) and arbitrage (short term) to take advantage of the mispriced assets etc.  

For present purposes, let's put aside the amusing cognitive dissonance that ought to be (though probably isn't) increasingly wreaking havoc with all those who like to mouth "we don't need fossil fuels" but still like to be warm etc etc.  It's the economic & commercial dissonance I'm interested in.

We can easily spot little Volodya Putin and other traditional upstream players making pots of money out of the situation.  They probably hope to make yet more.  China, though essentially an energy importer right now, will probably benefit in relative terms (that is, relative to the West) by being untroubled by 'green' scruples.  All this is easy stuff.  

But what of other business models?  Can 'western' firms somehow thrive in this crazy market?

Exxon:  it's been clear to me for a long time that Exxon, that ailing, blinkered and sluggish beast, is basically hoping it can quietly get on with not changing much at all, and not go down the costly, guilt-stricken route of Shell et al.  But is there anywhere to hide for a US stock-exchange listed firm of Exxon's prominence?  Can any others of its kind, smaller and perhaps less exposed to the limelight, pull off that trick?  

The big commodities players:  there are plenty of these big players - you all know who I mean, but slander is slander - who, if they have any scruples whatsoever, well I've never noticed.  (Ditto their shareholders: well they couldn't, could they?)   Some of these cos are indeed buying up fossil fuel assets: the energy version of money launderers and sanctions-busters.  Are the unscrupulous to be the big western beneficiaries?

A.N.Other Corp: this is where it gets really interesting.  Case study:  EIG Partners - ("Over the past decade, EIG has thoughtfully developed a quiet yet purposeful commitment to integration of ESG factors throughout our business")  - whose website homepage would encourage you to believe they are essentially investors in wind farms and solar.  But lo!  Earlier this year they quietly bought West Burton B, one of the UK's biggest, most modern and efficient gas-fired power plants, from EDF which is busily trying to reposition itself as 100% green.  And what magnificent timing: EIG has already made an absolute ton of money at WBB from the extreme market conditions of the second half of 2021.  

Here's another example: Vitol, who've also bought UK gas assets recently - this time from none other than Drax (who have problems of their own) -  and are likewise minting it this winter.  Here's how they brand this venture ('VPI'):  "We are part of the UK’s pathway to Net Zero, complementing the increase in renewable energy to power homes and businesses. Our portfolio includes hydrogen and carbon capture projects to help lower emissions and develop a future for decarbonised, dispatchable and flexible generation in the UK."  Oh and, errrr, gas-fired power plants.

So: is it all simply about greenwashing?   Maybe you just need the right "communications" firm in tow.  Good old capitalism at work:  assets change hands from those who don't know what to do with them, to those who do.  At distressed prices, if the former are panicky enough ...

Well, maybe.  I think Shell was hoping they could pull this one off, too.  Do we think it's all about shuffling the western-owned assets into less prominent, more media-savvy hands?  Or is it destined to be yet another massive transfer of wealth from the naive & decadent West to the hard-nosed East?   

ND

With dumb energy ministers like this ...

Minister says price cap not to blame for supplier failures:   Suppliers which have gone out of business as a result of the recent escalation in gas costs cannot blame the price cap because they should have been adequately hedged, the energy minister has argued. Appearing at the House of Lords Industry and Regulators Committee, Greg Hands said suppliers who were properly prepared have “clearly been in a much better position to ride out the big increases in global gas prices.”

OK, we haven't yet seen the full transcript and maybe Hands said something more nuanced later on.  Maybe ...

Here's the thing, Greg.  

(a) Just hedging volatile wholesale prices alone is hard enough for very small suppliers that have been stupid enough to sell forward at fixed price - which is of course what a very large % of residential gas and electricity customers (the ones that are active in the buying market) expect from their supplier.  

Why?  Because in order for the supplier to fix its own prices in the wholesale markets, effectively entering a forward contract (i.e. a financial derivative), it is getting into two-way credit risk.  Will it still be around to pay up if prices subsequently collapse?  That's the consideration from the point of the other party to the hedging agreement.  Of course, the small supplier should equally be worried about whether that other party itself will still be around to perform, should prices subsequently soar.  But that 'other party' will probably be at least three orders of magnitude bigger than the dodgy little twat-company that is the "small supplier" in Ofgem-regulated Britain: so not an issue the tiddler need worry about in practice.  And on the other side, well, who's going to extend the latter any credit?  So they can't actually afford to hedge much at all.  When they sell at fixed prices, in other words, they are taking a purely speculative punt on what the spot price will be at the time they must make delivery ('Northern Rock syndrome').

(b)  But it gets worse.  Suppliers don't just need to think about fluctuating commodity prices; the government has forced them to provide a price cap.  As eny fule kno, a price cap is essentially a Call Option, in the jargon of financial derivatives; and while (for the provider) hedging a price cap that's out of the money is relatively simple, albeit an advanced technical exercise, the cap that the government forced on suppliers was always fairly close to being at-the-money - a vastly more difficult and sophisticated, costly, dynamic hedging challenge.  (It's deeply in-the-money now! - which of course means wipe-out for the unhedged...)

But we are not talking players who are remotely capable of mastering sophisticated derivatives challenges - we are talking a bunch of opportunistic, under-resourced minnows, some of whom have extremely dodgy business models and that should never have been licensed in the firstplace!

So, Mr Hands, while you may fairly expect the Centricas and EDFs and Eons of this world (and maybe the Ovos and Octopuses ... maybe?) to have their shit together, you should be looking squarely at Ofgem for the rest.   Licensing players with no capital, but then imposing a tight-fitting cap, is a sure recipe for what's happening right now.

ND 

Self Sufficiency Revisited

For it's Tommy this, an' Tommy that, an` Chuck him out, the brute! 

But it's " Saviour of 'is country " when the guns begin to shoot

[In response to a BTL question last week]

Yes, paying for an insurance policy is always annoying when there's not a cloud in the sky: but there's always regrets when the rain sets in.  So now the cry goes up: why do we have so little gas storage?  Why did the government allow the Rough storage facility to close?  Why are we so much worse off than the Europeans?

The answer, ladies and gentlemen, is the usual convoluted story.  Rough (a partly-depleted gas reservoir in the southern North Sea) was cannily sold by its American owners to the old British Gas (when still a monopoly / monopsony) for conversion to a storage facility.  They spent an epic amount of money on it, and were very proud of it when it came on stream.  But there's a very strong case that they never actually needed in those days (1980s), such was the strength and diversity and flexibility and reliability of North Sea gas production straight from the fields.  However, monopolies of that kind are run by engineers, whose solution to every question is "build more stuff", especially when they can just dump the cost on captive customers.  And so they did, gold-plating and all.  How we all laughed.

Two changes of hands later and it's back with Centrica, one of the several linear descendents of the old BG.  Rough is huge, & what we call "seasonal storage", i.e. 180 days to fill it, 180 days to blow it down (rather than smaller fast-cycle: perhaps 30 days to fill and 10 days to blow down).  It found its place in the early years of this century as a perfectly commercial asset, making its way in the very liquid, dynamic gas market that developed in the last half of the 1990s and hasn't (yet) looked back - indeed, it's spread to the whole of Europe.

Where they still, however, do some things a bit differently, most notably in Italy.  Some history: with the exception of the Dutch, they've all been uncomfortably dependent on Russian gas for many decades - enough to make anyone invest in a good bit of storage.  In most countries it is operated more-or-less commercially, with the glaring exception of Italy (also a big importer from, errr, North Africa) where the government mandates in detail the maintenance of extremely costly, and most would say excessive, gas storage inventories, and won't allow the storage facilities to be operated commercially at all.  As insurance policies go, this one is very costly indeed.  The French used to be similar, but not for quite a while now. 

Because ... we now have a thriving and very efficient integrated European gas market, embedded in an increasingly efficient global gas market mediated by shipborne LNG - so folks can choose their supply-security measures from a range of alternatives:  physical storage; virtual storage; call options; flex contracts etc etc.  They all have their pros and cons: I could draw you a nice table in powerpoint®.  So when Rough suffered a couple of explosions and became "too costly to repair" (and after Centrica's pleading for a special subsidy fell on deaf ears) it was allowed to fall idle.  (Though not abandoned, because Centrica dreams of getting a big subsidy to restore it / convert it to CO2 storage / convert it to hydrogen storage / convert it to a theme park / anything, really  ... except shell out for actual, final abandonment.) 

Behind this lay an important factor: the price spreads (seasonal, and general volatility) that drive the value of a storage-option were in the doldrums, and remained that way for the best part of a decade.  Centrica wasn't the only European operator closing storage facilities during that period, by any means.

The decision was perfectly fair, commercially; and not particularly negligent of the government of the day, either.  Because, even now there's little concern we will run out of physical molecules of gas, from a variety of sources: it's just the price that folk don't like.  But hey, markets are like that when there's an Actual Shortage; and more storage in the North Sea would barely be noticed against the global price-spike we are now suffering.

HOWEVER: it's fair to say that at times like these, the whole "efficiency / rely on an effective market" vs "self-sufficiency / don't trust the market" debate gets revisited with a vengeance, and rightly so.  Because There's No Right Answer!  There are some well-tried quant methodologies to deploy, and they illuminate the issue:  but as ever it all hinges on the assumptions.  People who are anyway self-sufficient tend to lord it over the rest and claim their position is the moral high ground.  People who could never remotely be self sufficient (e.g in Belgium, where there is no indigenous gas whatsoever) are, faute de mieux, rather keen believers in open markets.  I once had a very interesting discussion with a Chinese person (a commissar with a commercial delegation) who, on receiving a presentation about cross-border gas and electricity interconnectors in Europe, commented sniffily that it was a very bad thing for a country to be reliant on imports for gas and electricity.  I politely remarked that yes, it was a debating point for several nations, not least those who import almost all of, *ahem*, their oil ....   I digress.

This is indeed a debate we return to periodically here, not least with our good friend Sackerson.   And we've discussed Rough specifically, too.   There have always been fair points on both sides.  Personally, I'm way up the open-market end of the spectrum.  But it's a continuum, and if you can ever identify clearly enough that the risks are increasing (volatility is generally a good metric) then you can justify a higher insurance premium - be that in the form of storage, call options etc etc.  Since it's been going that way since Jan of this year (I first wrote about it here in Feb), you may be sure all the capable players have been doing just that.  And, by the way, there's no obvious reason why volatility should be going away any time soon, and plenty of reasons why it should stay high.

ND

Corporate Software Madness, Part 94

A periodic discussion point around C@W is the hash that apparently capable companies (and governments...) make of software procurement and installation.  The amounts of $$$ that unscrupulous and rapacious consultancies - "system integrators" - make from these suckers is quite astonishing; and  frequently with crap end-results to boot.  They advise their clients to spend far too much; they pocket the lion's share (often leaving the software vendor grovelling in the dirt); and their implementation skills & project management are deficient.  Yet still it goes on - year after year.

So I snorted loudy, but was not unduly amazed, upon reading this announcement - possibly the biggest triumph of optimism over experience I've ever seen:

E.ON enlists software company SAP to digitalise its power grid and customer service in a 2-year project, the heads of the two companies, Johannes Teyssen (E.ON) and Christian Klein (SAP) said in an interview. In total, E.ON is investing several hundred million euros in the digitalisation of its network and sales division and a “high double-digit million euro amount” in the cooperation with SAP, Teyssen said...

A story.  Many years ago I worked for an energy company that knew what it was doing.  When gas trading started in the UK we knew, from our US experience, exactly what was needed for deal-capture and processing which, in the early days of trading (with modest deal-flow) was not a massive software requirement.  We turned loose two of our own employees who were versed in MS Access, and they designed and delivered a wholly workable system in 6 weeks flat.  Cost?  Bugger-all, seeing that Access was conveniently on everyone's PC already, licensed as part of the Office suite.  Just two guys' time, and a round of training for front, middle and back office staff.

Shortly thereafter I was invited to expensive lunch by a competitor.  As always, the reason only came up at coffee.  We are outgrowing our gas trading spreadsheets, he said, and we know we need some proper software.  Our 'Big 4' consultantcy has advised us to budget £6m - does that sound about right?

I let him carry on in his state of blissful stupidity.  Reprehensible, I know.  Well, it was their money - and a nice lunch.  Their project took nearly a year.  You may safely bet the consultancy spent the full budget for them.

Now, about E.ON's high double-digit million euro amount.  "... in cooperation ..." ?!  €99m buys one f*** of a lot of "cooperation" in my book.  All so wearily familiar.  Still, I suppose they'll claim it as a necessary outlay to the German network regulator.  Add it to the Energiewende bill - it's small beer in that context. 

*   *   *   *   *

Footnote:   Further to my recent note on Centrica trying to flog off its LNG portfolio:  "Centrica resumes talks on potential sale of North Sea oil and gas venture Spirit Energy (Bloomberg).  The company is in discussions with 'a number of parties' regarding a sale of its controlling stake in Spirit Energy.  The stake could be worth $1.8-1.9bn."  Maybe that LNG sale isn't going so well.

ND

Centrica: as predicted, more assets on the block

Back to the day job, eh?   In September we wrote this:

And so it comes to pass, according to the WSJ, which reports that Centrica has put its fair-sized global LNG portfolio on the block.  It further reckons that the company "may actually need to pay any potential buyer to take the LNG business off its hands, underscoring the uncertain outlook for gas prices internationally".

Oo-er.  That won't be what Centrica has in mind.  Can we form an independent view on the sales value?

Not readily.  Firstly, in its published reports Centrica wraps up LNG in the results of its trading division, a traditional smokescreen behind which all manner of things can easily be hidden.  Next, it only publishes sketchy info on the individual deals that comprise the portfolio (commercial confidentiality: fair enough).  

Most importantly, however, Centrica very explicitly declines to offer a mark-to-market valuation for its big long-term LNG contracts (page 108 of the 2019 AR), of which it has several.  Its *reasoning* for this omission is that there are as yet no transparent long-term forward curves for global LNG.  That can be argued either way**, so their case can indeed be made.  BUT - the trouble is this excuse has frequently been used disingenuously, nay, culpably, by energy companies in a similar stew to skate lightly over eye-wateringly large negatives (in the billions, in some cases) that, although nobody could calibrate them accurately, are known by everyone in the industry to be very much on the red side of the ledger.  And here?  Who knows: I don't.  But it means that literally nowhere in the accounts does a full valuation lurk - even an estimate, even bundled with other stuff.  Institutional shareholders could easily take fright at that, when they consider what lay behind the scenes in other such cases in the past.

If prospective bidders all put a negative value on the LNG portfolio, I can't imagine a deal being struck.  But what other stand-alone assets does Centrica have to sell next?  And - are they due for a nasty downside surprise in the forthcoming Energy White Paper, which is set to pronounce on the fate of future UK large nukes, probably impacting on the value of Centrica's fateful 20% holding in EDF's UK nuke portfolio.  All rather uncomfortable.

 ND 

___________ 

** I'd argue that a pretty good forward value could be put on the LNG deals out three years.  Further, though I'm not an accountant, doesn't the conservatism principle require that forseeable losses should promptly be disclosed? 

"Energy is Big and Sexy" - BBC. Well, Yes

As you will imagine I have been idly watching the Beeb's Powering Britain, not in the hope of learning much, but rather to see how prime time TV covers - or dodges - some meaty issues.  Needless to say, for the most part the four episodes have been lavishly-photographed tourist guides, our breathless reporter always being gushingly overwhelmed by the scale and sheer sexiness of the whole thing.  Big Engineering always has that effect - if you steer people away from dirty, leaky old kit and fix their gaze firmly on the shiny new stuff.  Helicopter rides are generally quite fun, too (on a day when the weather's ok ...)

All in all, a massive PR opportunity for the firms involved (SSE, Drax, Spirit and EDF) which naturally they've seized with both hands and immense gratitude.  Can't have done the whole industry any harm, either - give folks an idea of the scale of what it all means; romance of engineering & commerce, etc.  Indeed, if a similar series had been run on commercial TV or a newspaper, you'd assume it was paid-for advertorial stuff.   

And not a Green in sight!   Dear me no - we're all quite green enough without letting Swampy or Greta come on with their whingeing and wimpering.

Controversy has barely been acknowledged: just the once, really, over Drax.  The SSE episode was about the world's biggest offshore windfarm and its onshore receiving station - including the merest hint (which probably passed unnoticed to most) about what's fast becoming a cause célèbre, the culpably chaotic business of digging big cable corridors, generally through highly sensitive coastal geography & habitats etc, with no obvious sign of planning / coordination on the part of National Grid.  Otherwise, it was just 100% jaw-dropping Big Kit on display in breathtaking marine vistas.  And no mention of what happens when there's no wind? ...

The Spirit episode featured their huge Morecambe Bay gasfield and its onshore gas processing plant.  (If you haven't heard of Spirit, it is a Centrica spin-off, one of the many new 'end-of-field-life' specialist O&G producers who manage upstream assets when development risk is long since past and the original developers - in this case British Gas - have better uses for their capital.)   Big offshore installations are pretty mind-blowing, so no shortage of gawping to be done here.  What controversy might have been expected?  Well, there are some people for whom even mention of fossil fuels in any other sentence than "we are closing this thing down as fast as humanly possible, ideally tomorrow morning".  But the Spirit PR team had put clever words into the mouth of the plant manager, who simply said that we'll need gas for a few more years on the path to Net Zero Carbon (tacitly answering part of the question left by the SSE programme), and that they were there to do their bit.  The Beeb felt no need to qualify that with any sort of counterpoint voice-over.  

The last episode was on EDF's nukes at Heysham, and the nuclear fuel plant at Springfields down the road.  They didn't explicitly use it to answer another part of the unasked SSE / wind question.  Obviously, they could have filled the entire slot with nothing but controversy (see, for example, the Public Accounts Committee report published today); so they ran with more-or-less none whatsoever.  Fair play, it had to be that way, really: though arguably they might have mentioned the cracks in one of the boilers and some of the fuel bricks ...  So it ended up quite pedestrian to my view.  I was, however, entranced to hear engineers talking in "thousandths of an inch" (it was the same in the Drax episode) which jars a little.  Then again, I imagine they run the plant on Windows 98 or some such.

So what about Drax, then?  Yet again, they didn't use it to answer the SSE / wind question (- it actually contributes to both parts, in fact); but, yes, they really couldn't - and they didn't - fail to mention that burning trees to generate electricity is controversial.  Which it bloody is - an outright scandal, in fact, compounded by the risible official "green" carbon-accounting convention which allows Drax to ignore CO2 emitted at the point of combustion, and hence to qualify for 9-figure sums in annual "renewables" subsidies despite emitting more CO2 than in the days when it was burning coal (and vastly more than if the same electricity was generated instead by gas) with the distant prospect of maybe that CO2 being maybe absorbed by replacement trees (maybe) 50-100 years hence (maybe).

They've got me started now.

Anyhow, all four episodes are labelled "Series 1" so perhaps they'll follow up with more later.  There's no shortage of energy companies with big PR budgets, interesting stories to tell, and photogenic kit to display.  One thing we may predict: there will be a lot of Greens who are furious at the easy, glossy ride the Beeb has given the industry in these programmes, and will be pressing to get more *balance* into any subsequent series.

ND

Centrica: Decline of an Old Friend

 Picture ... thousand words ... etc

I've always had a soft spot for Centrica, ever since they got off on exactly the right foot back in the 1990s when British Gas was triumphantly de-merged.  Maybe it's to do with the mighty relief of the break-up of that ghastly, brutal monopoly.   Newly-liberated Centrica did an awful lot right; and as the years progressed, they were clear-sighted, objective and flexible enough to recalibrate their strategies in the face of changing market circumstances (including cutting their losses decisively when called for).  Not least, they've staved off being gobbled up.

You'll find we've written about them, on and off, for years - and not always in complimentary tones because they haven't been beyond reproach at all.  Worst of all has been their nuclear gamble, when they got hopelessly carried away by their stonking coup of buying a heap of electricity from the old British Energy at the absolute bottom of the market, when Gordon Brown (remember him ...) was engineering a bail-out.  That was very good business (one of several such opportunistic bottom-of-the-market coups - almost as good as John Browne / BP in 1998), but it wasn't to last.  Participating as a more-or-less passive partner (OK, patsy) in EDF's outright purchase of BE in 2009 was crass, and they've regretted it from the day they agreed it, probably even before the ink was dry.  And they've never found a way of severing the ties, despite committing to do so by the end of this year.

Still, it's sad to see them the way they are now, cancellation of dividend and all - even if they are by no means alone among broadly competent energy companies out of favour right now.  Earlier in the year we said there needed to be some meaningful asset sales and that remains the case, IMHO.  But it seems we have to wait for developments on the nuclear front ... 

Centrica still plans to exit both E&P and Nuclear, but divestment programmes have been paused until the financial and commodity markets have settled.  

Yeah, right - doesn't sound much like any time soon.  Which must mean selling something more conventional than a part-share in EDF's mouldering, cracking-up UK nukes (with the associated energy-sapping politics that EDF wages all the time against HMG).  

Still, they remain a competent lot.  How much of that former clear-sightedness and objectivity do they retain?  The sale of Direct Energy (their big North American supply company) is a start, and must be a wrench: they bought it in 2000 as part of their Enron wannabe strategy, and grew it to #2 position in North America.  So maybe they really are up for it.

ND

Centrica: Tough Times, Hanging In

Centrica is a company we perennially find interesting, for a couple of reasons.  They've successfully remained UK-owned, which many of their energy-sector peers haven't;  their strategies have generally been noteworthy, indeed often quite smart - which kinda relates to the first point;  and it's rarely been plain sailing for them - which comes with the territory.

They're yet again at an awkward juncture,  needing a new CEO and some substantial asset sales, both to manage their debt and, frankly, to exit from a couple of increasingly difficult sectors - upstream oil & gas production and nuclear power, neither of which are flavour of the month for investors.

Nuclear?  Yes, it's easy to forget they took a 20% stake in the old British Energy nuke fleet from EDF back in 2009, which didn't look so clever a short while later - so much so, they've never been able to shift it.  Why did they do it?  A couple of ostensible reasons: it was a package deal in which they offloaded some unwanted Belgian assets; and they thought of the nuclear electricity as both green(ish) and "a hedge against the vagaries of global commodity prices".  There was another (unstated) reason, too: in the 2000's they had very fairly made a bit of a name for opportunistically picking up big assets at distressed prices - several gas-fired power plants, a big gas storage facility and a huge tranche of electricity from BE - judging the bottom of the market very adroitly.  By 2009 they were just too pleased with themselves, and thought they could do no wrong.

Seems a long time ago now.  But they've stuck to their core strategy - excelling (well, doing OK) at retail energy as that sector gets more and more difficult, on a last-man-standing thesis.  Seeing weak hands all around them amongst both the Big 6 and the plethora of failing minnows we've talked about recently, they probably still reckon they made the correct bet there.  Even the burgeoning Ovos and Octopuses of this world aren't finding everything quite as straightforward as they hoped.  With the threat of asset-seizure under a Labour Government gone, and nobody likely to object about an energy retailer doing a steady job (Big-6 or not), Centrica will probably stick with this.

They still need those asset sales, though.  Nuclear is a mug's game - particularly being strapped to EDF, whom we'll look at in another post.

ND 

Centrica's Woes and What They Betoken

From time to time we pass comment on Centrica - partly because energy is one of our themes; and partly because from inception as an Enron-wannabe spin-off out of the old monopoly British Gas, it's been an interesting company on an interesting 'journey' (as we're obliged to say these days).  

You can click on the link below to see our sporadic past comments.  Not all of them have been favourable, because Centrica went through a misguided phase of loud special-pleading for subsidies, which didn't endear them to us - or indeed to the government.  They've taken a few outright false steps over the years, notable among which were the move into "we-can-do-everything" banking & telecomms; and the big stake they took in British Energy nukes alongside EDF.  But they've done clever stuff too: intelligent re-calibration of commercial policy when things weren't working out as intended (these days we must call this 'pivoting'); and a series of adroit asset acquisitions (most notably gas-fired power stations and long-term electricity supply contracts) when prices were rock-bottom.  Their technical skills in the marketplace have always been pretty fair.

All in all, to have stayed independent for nearly 25 years is no mean achievement.

But today they have serious problems to address.  Mrs May's inane price cap has weakened the entire industry, as was widely foreseen; and for a couple of years now insider commentary has not been kind about Centrica's strategic decsion-making, once so laudable.  Share price has reflected these things. They are 're-basing the dividend' and the top man is quitting. 

There doesn't need to be any sentiment in this: but I feel uneasy when good companies can't find a way through.  The residential gas & electricity supply business is of course going through a shocking phase.  May's cap; the plethora of minnows that should never have been given licences (Ofgem's grievous fault) and have been going under at a rate; big players like RWE (Innogy/NPower) and SSE trying to exit ... this is a mess.  And against a backdrop for the entire energy sector of trying to get to grips with whatever the 'decarbonised' future will bring.

Civilisation is energy-intensive, as the great James Lovelock reminds us (he's just turned 100) - and society needs capable energy companies.  In civilised countries, energy should be like water and food: so well managed that the miracle of abundance goes almost unnoticed.  Darwinian processes are fine: but there's no pleasure in seeing a big healthy beast fall sick.  Yes; things can go very wrong if the energy market isn't working well.

ND  

Nuclear Spring?

This week promises to be quite interesting on the nukes front.  We are promised announcements (belated) on the government's Small Modular Reactor programme, and things have been looking up a bit on the Big Nukes front, too. 

We've looked at SMRs before.  The potential is certainly there, on paper - before the prospect is dashed by the NIMBY reaction, city by city, where they need to be installed in order to secure one of the primary benefits (= highly efficient district heating).  Still, Blair thought the British Public wouldn't stand for any type of nuclear revival back in 2005, and forbad any mention of it before the GE of that year.  Plenty of people, including hereabouts, bitterly resent the Hinkley deal - but mostly on economic grounds (and warm traditional feelings towards the French, of course).  It doesn't seem to be a vote-loser, though.  But that maybe because it is on a brownfield site in a remote Somerset field ...

Needless to say, the would-be developers just want public money to get started.  They'll probably get a bit, actually.

On that large-nuke front, the players who were making UK waves five years ago have more or less melted into the background (excepting EDF, of course) and, unsurprisingly, Centrica would like to be out altogether.  But the government seems to have found replacements for them - Chinese and Koreans - with revived interest in the Horizon and NuGen projects.  On paper (again) you could argue there is still 18 GW of capacity under consideration - that figure includes Hinkley, which is not actually being built yet, they are simply being rather flamboyant in their preliminary civil engineering (the photo they always show is just the concrete-mixing plant).

A week from now we may have a clearer picture.

ND 

When the Big 6 becomes Big 5

Over the years we've often suggested that the way government and regulators cheerfully beat up on the big 6 energy suppliers isn't terribly clever.  It's very handy for them to have big corporates to do their daft bidding in energy and climate-change policy; but simultaneously allowing them to be popular whipping-boys, and loading them up with onerous social and policy-delivery obligations, is inviting them ultimately to jack their hands in and step away from the table altogether.

It has also been clear that not all of the Big 6 necessarily have the financial stamina for the long haul, never mind the stomach for it.  Margins in the residential sector are lousy, and the risks are great.  Hanging on in there as a 'last-man-standing' strategy isn't a work of commercial genius.  (Though, since most of the suppliers are still engineer-heavy at the top, and with truly dreadful track-records on both customer service and, perhaps counterintuitively, IT - trust me on that latter, I've dealt with all of them - commercial genius isn't necessarily to be expected.)

Three years ago we noted that RWE / NPower / Innogy (pick you prefered brand-name) was occupying the bed closest to the door, and so it has proved.  They and SSE have had enough, and intend to merge their portfolios of residential energy customers and float them off.

Having reduced the competition at the big end of the sector by one sixth, will the government be inclined to think again, and cut them some slack?  I doubt it.  May seems determined on some kind of price cap.  Ofgem is ecstatic abut how many tiny new entrants there are in the residential sector, notwithstanding their very patchy performance, inherent financal weakness, and parasitic dependence on the Big 6 keeping the main show on the road.  (One of the canniest decisions Sadiq Khan has made was stepping back from a manifesto promise to set up a publicly-owned, fully-fledged London energy supplier.)

In all this mess, then, it's little surprise to see NPower and SSE look for an exit strategy.  Of the rest:  Centrica is, after all these years, still a remarkable survivor as a UK inde.  It had shrewd and genuinely commercial management from the day it de-merged from the old BG 20 years ago.  We've had issues with them over the years (check the Centrica thread from the tags below) but they're OK.  EDF's continuing to play the game is of course 100% strategic for the French based on making sure nothing prejudices Hinkley.   Right up until they decide that game's not worth the candle, either.  On paper, EDF is bust already if you factor in all their nuclear liabilities.  But the French government won't let them go under.  (Check the EDF tag too, for various C@W stories over the years - starting with this pivotal one from 10 years ago which explains plenty.)

That leaves E.on and Iberdrola (Scottish Power).  Neither are as strong corporately as they were when the turned up in the UK; and I can't see the UK being strategic for the Spanish.  E.on are corporately sharp, mostly clear-sighted, and can be quite decisive when it comes to restructuring.   But, EDF's special circumstances apart, they are the strongest of the lot.

Newby tiddlers notwithstanding, the landscape hasn't changed much for a decade, i.e. since EDF came to town in a big way.  I couldn't begin to guess what it will look like in 5 years.  But I can tell you electricity prices will be higher.

ND 

Gas Storage: Rough Old Business

One of our esteemed Anon's asked what's up with Centrica closing down the Rough storage facility.  It wasn't a complete bolt from the blue.  But it's not small !  Rough represents getting on for 75% of UK's gas storage inventory - though a smaller % of total deliverability from storage, because Rough is a slow old beast and can't pump out very fast.  The new generation of 'fast cycle' facilities are smaller but can fill and empty in a couple of weeks, vs Rough which more or less took all summer to fill up, then months to blow down in winter.  'Seasonal storage' in the terms of the trade.  (Rough trade, geddit?)

Well, it used to be ...            graphic from Centrica

I wrote about some of this at fair length a few years ago when M.Fallon called Centrica's bluff and declined to subsidise them to build a new one.  So they didn't.  It was unusual for a politician to spurn a request of that sort in 2013, and it's even more unusual these days.  No-one builds a power station of any kind today without public money (via electricity consumers) being sent their way.

Rough was always an artificial thing, built by the old BG in the early 80's - the closing days of their monopoly, when they could just pass through the costs.   It's very debatable whether it was needed then: but they just did it anyway - because they could.  Engineers love building things.

Seasonal storage is not much wanted these days either - the spread between summer and winter wholesale gas prices is at an all-time low, which signals as much.  It's one of the reasons Centrica can't justify restoring Rough to health.  That and the one-off revenues (half a billion quid over a few years) they will make as they blow down the rather substantial amount of 'cushion gas' for the last time - the opposite dynamic to most offshore field abandonments, which only cost money and are therefore typically put off as long as possible.

How will we cope in winter?  We nearly found out in March a few years back when Rough temporarily conked out during a cold spell.  Extra LNG cargos should do the trick: we have very substantial LNG regas facilities in the UK - built by Mr Market Mechanism between 2000-2010 with narry a subsidy in sight - just a bunch of companies willing to follow through on the obvious fact that UK gas production started its terminal decline at the start of the century.  Glory be.  One of the great examples of the market being left to run its course that I often like to cite.  (It helps that regas is really cheap and quick to build.)

Come that freezing March month, and it may not be cheap in the spot market, though ...  then you find out who's hedged and who's shorts are dangerously exposed.  Chilly, it can be.  And of course if our good friends in Qatar are still in bother, well, hmmm.

ND

Buyer's Market - Get Stuck In

Open those valves

There is a pronounced and timely surplus of natural gas right now, with no obvious end in sight.  With even Gazprom having run up the white flag on oil-price indexation, now is an excellent time for the utilities to be buying.

Centrica, a company of mixed virtues (check the tag for past examples) but always exceptionally shrewd in its purchasing - of assets as well as commodities - has just taken the opportunity to back up the truck to Qatar for a big contract roll-over, which is intelligent.  They'd already done the same with Gazprom last year.

Interestingly, for the first time in years gas-fired power plants are back in-the-money (hence all the big coal-plant closures this year).  It's not so surprising in the UK with our 'carbon price floor' (a tax devised by Osborne) which boosts gas at the expense of coal.  What's more surprising is that there is a small window of gas being in-the-money in Germany, where they still have only the perennially depressed Emissions Trading Scheme carbon price to contend with.  That really is somewhat unexpected, and probably won't last for long into the coming winter as gas prices rise, both seasonally and with the time-lagged effect of the upward nudge to oil prices since January (Germany still buying a bunch of gas at oil indexation).

This is real energy business, and to hell with Hinkley and the EU 'Energy Union'!

ND

Silly Season Over: Energy Troubles Ahead

I am not one to shout "the lights are going out" too readily, because the government will always make the Grid do whatever it takes, however costly & stupid, to keep homes and hospitals supplied.  But while everyone has been marvelling at Olympic success /  Corbyn lunacy / mass drownings on the beaches of Britain, over the summer we have been tipped off that there could be some real problems for power and gas supplies this coming winter.

On the power side, the pace of closures of coal-fired power stations this spring really caught the authorities by surprise.  We were always going to be down to about 1% capacity margin in the depths of next winter, and now it's going to be negative - even after the Grid has bribed a couple of the coal generators to stay open for just one more season, which is the only thing they have come up with.

And on the gas side, the UK's only really big gas storage facility (the large offshore Rough field) has run into serious problems of old age.   Centrica (the owner) is nursing it back into a few more years of reduced operations, hopefully in time for winter: but we know of old what happens in a cold snap when Rough falters - it's at very least a peaky spot-price spike.  We just about got away with it during a cold snap three years ago.  Next winter, anything much more than a week's worth of extreme cold and we may be (a) completely reliant on some fortuitous LNG cargos becoming available in the Atlantic (= not so cold in Spain + Eastern USA), or (b) stuffed.

[Rough isn't the only large and ageing provider of gas flexibility in winter we won't be able to rely on in future: the mighty Groningen field in the Netherlands, Europe's biggest for over 50 years (sic), and the very large Norwegian Troll are both ailing.  In the Dutch case, the hammering of Groningen for decade after decade is now causing fairly noticeable earthquakes.] 

The real killer will be winter 2017-18.  This game of keeping coal plant on life-support cannot be repeated indefinitely: it's in the nature of large capital assets of the steel'n'concrete variety that once they've been fingered for closure, discretionary maintenance work stops and the whole thing becomes a self-fulfilling prophesy.  Recall also that back in 2008 the EDF Chief Frog said that by 2017 we'd be cooking Christmas lunch on Hinkley Point C electricity, because otherwise the lights would be going out.  Well, he lied about HPC but otherwise he knew that of which he spoke.

Yes folks, it was broadly forseeable way back then (which was when we started blogging about it!), but neither Labour nor the Coalition did anything serious about it.  Takes a while for those plump Xmas turkeys to come home to roost, but they are on the horizon - and they may escape the lunch table altogether.

ND