'Big 6' Fragmenting? HMG Beware

For some time now I have been suggesting that if the government continues to beat up on the hated 'Big 6' energy suppliers, it may wake up to find only 5, with RWE and Scottish Power (Iberdrola of Spain) probably the weakest hands.  E.on has its problems too: and while the others (Centrica, SSE and EDF) all probably have sufficient UK energy market ballast to stick around and play 'last man standing', even Centrica has been known to make dark hints.

The beating these guys take isn't just non-stop public floggings in front of fatuous parliamentary committee hearings or in the media.  Nor is it even the fines that Ofgem periodically boxes their ears with (they probably deserve them).  It's also the extraordinary burden of social obligations and 'green' policy objectives they must comply with, because under current and future energy policy they are the vehicle through which government raises billions, soon to be tens of billions for its inane interventions in the energy markets.  No wonder the barriers to entry in the sector are considered well-nigh insurmountable.  General taxation would be the honest (and progressive) way of doing this but they find levies on unavoidable energy bills a more expedient approach.

And now RWE has sold off a large chunk of its UK supply portfolio.  Of course this is being spun as creating a 'Big 7', hence better for competition: but this shouldn't fool anyone.  RWE is a sickly beast, having taken even worse beatings at the hands of German energy policy, and desperately hanging on (like E.on) for massive compo they are suing the German government for in respect of the half-baked, summary closures of their nukes.

Companies have sold chunks of portfolio before, but earlier sales were part of of the baleful consolidation process which, coupled with the restoration of vertical-integration-via-acquisition that we've slated here before, is how we got to the 'Big 6' stasis everyone seems to despise.

In many respects we already had a Big 7 because GdF of France has quietly assembled a UK portfolio of power generation assets and industrial customers making it bigger than Scottish Power in most aspects other than residential customers (of which it doesn't have any).  And Gazprom (yes, Gazprom) already takes the #8 position.  But there ain't much scope for small players in this market (and why should there be?), notwithstanding that gas retailing (to industrial customers) is a relatively straightforward proposition (not electricity, though - nor residential sales).  From time to time a fresh new hopeful joins the fray, for example Co-op Energy (!).  Good luck to them all.

So - let's see how Utility Warehouse, the proud new owners of 770,000 of RWE's best UK customers, make out in this bracing environment.

And watch out for further retrenchment, by RWE and others.  That's a warning for HMG as well as a comment for investors:  how much investment towards their mad, hundred-billion-pound energy schemes can they expect from these guys when their balance sheets are under such pressure ?

ND

Capitalism Neutered

Here's a reflection of the state of British business in 2012.  As part of a barrage of favourable coverage of Centrica (8 pieces in 3 days), the ever-reliable Telegraph faithfully copies out a press release announcing:

Centrica and GDF Suez are to develop a major North Sea gas field, creating up to 4,000 jobs, after the Treasury handed them a tax break... The companies will invest £1.4bn in developing the Cygnus field, about 100 miles off the North Norfolk coast, and said 80pc of that would be spent in the UK.  The Government’s new tax allowance will apply to income from shallow-water gas field production, such as the Cygnus field. It will exempt the first £500m of income from a 32pc tax, saving the companies £160m. Centrica, which owns British Gas, said the tax break would “enhance the economics of the Cygnus project”, enabling it to proceed with the development ... Centrica said the allowance would enable it to proceed with the development of the Cygnus project, the largest gas discovery in the Southern North Sea for 25 years.

Cursory research into the Cygnus field reveals that is indeed a biggie - anywhere north of half a trillion cubic feet of gas, maybe 2 TCF.  It's in two geological intervals, the Leman and Carboniferous sandstones; in shallow waters; and can be tied back into an existing platform and pipeline system.  Most readers won't know the significance of this, so let me assist.

Firstly, 0.5 - 2 TCF makes it one of the largest gas fields ever found in UK waters - absolutely huge.  Fields of this size have supported the development of whole new platforms and pipelines to the shore, at times when the price of gas was very much less than today's, and drilling technology was considerably less effective.  Fields substantially less than one twentieth of this size have been developed profitably when they can piggy-back on existing infrastructure like this one can.  The Leman sandstones are very productive and contain gas of excellent quality.  The Carboniferous can be a bit more problematic, often with relatively high CO2 content, but the existing infrastructure that Cygnus will be utilising was designed to cope with it.  And shallow water naturally makes for easy drilling etc.  So on every count, Cygnus is going to be Very Profitable Indeed.

In other words, we can be 100% confident that developing Cygnus is a complete no-brainer for Centrica and GDF, and requires no tax break of any kind.  It is nice of Centrica to say that Osborne's largesse will “enhance the economics of the Cygnus project” - well of course ! - but to pretend that this is what allows the development to proceed is grotesque.

But hey, this is business in 2012.  You stomp down to Whitehall and announce that you will hold your breath until you go blue in the face, unless someone bungs you a sub. The civil service, always a sucker for a bit of special pleading, assures the childlike minister that a sub is indeed called for: it is promptly trousered and the company gets on with what it was always going to do anyway.  Centrica has form; but everyone is learning the game, and of course the nukes and renewables are even worse offenders.  The corporate version of the dependency culture, with a similarly debilitating long-term effect.

This, I suppose, is what you get when ministers have absolutely no real-life experience whatever.  Osborne, we know about; and as for energy minister Ed Davey: As a teenager he worked at Pork Farms pork pie factory and at Boots. In 1989, he became an economics researcher for the Liberal Democrats. 

And there you have it. Pathetic, really. 

ND

Miserable Pleaders

We have inveighed against the energy-market subsidy-wallahs many a time and oft; but it isn't just the wind farmers, dung burners and CCS merchants, who know no better.  Nor is it confined to hints and briefings by the big players (GDF most recently; and EDF & Centrica passim ad nauseam). 

This form of behaviour is becoming institutionalised to the point where proper companies are rattling the begging-bowl in banner headlines alongside their logos at the top of their web-pages. I give you Drax, owners of Europe's largest (and 'cleanest' !) coal-fired power station.

"Given an appropriate level of regulatory support".  Ah yes, 'support'.  And they do mean given !  They have no shame.

Away with them all.

ND 

The Imprint Of The Last Person To Sit On Him

The finance pages of the Telegraph often make me smile, you can always tell who's been giving them lunch, more so even than most newspapers' business coverage. In fact, it's in the Polly Toynbee league.

Energy stories of the last couple of days make the point nicely: first of all a(nother) piece on Aggreko, "a global provider of temporary power solutions in a world that is structurally short of power ... It provides generating capacity and air conditioning for world-class events". Yeah, yeah, we've got that, in fact we remember it verbatim from several other occasions, pass the brandy would you ?

Then there's "Buy-out frenzy predicted in oil recruitment ... Britain's oil and gas recruitment industry is poised for consolidation". Frenzy? Literally the only person who cares about this is the PR type that fed the guff to the DTel - mildly amusing to read the piece and guess who it was. Hope the claret was a good one.

Actually there is a decent, chunky energy story on the DTel's pages this week: "International Power agrees £6.4bn GDF Suez offer: GDF Suez, the French utility, has agreed to pay an improved £6.8bn [on top of to take full control, just 14 months after buying a 70pc stake".

Numerical discrepancy aside, this is a big deal. It's an interesting tale, too. Some C@W readers don't like johnny frog buying our companies; and this one seems to have a rather fruity tang to it. We shall be keeping a watch out.

ND