One of the Oxford Institute for Energy Studies’ leading academics Jonathan Stern is rightly concerned. In the past two years utilities have been forced to contemplate dramatic changes to their business models to adapt to a changing (and challenging) environment.
And there’s no guarantee these bets will pay off.
Stern told delegates at the recent British Institute of Energy Economics that the debate about state versus private ownership of utilities could become redundant because a Government buyout might become an unavoidable measure.
“These companies may go broke unless something dramatic happens,” he warned.
Upstream oil and gas activities are no longer lucrative and fossil fuel power generation is under pressure in terms of both profits and politics. It’s out with the old and in with the new, cleaner ways to deliver energy to consumers. And consumers, in the new world order, are key.
Companies have reacted accordingly with planned moves towards an increasingly customer-centric business approach with limited exposure to their previous capital-intensive, centralised energy activities. But charting a new path is easier than walking it, as Eon recently discovered.
The German utility giant’s plans to siphon off its loss-making business units to create a ‘bad bank’ style energy company have been left in tatters after the German government’s legislative check-mate. Eon hoped to buoy its bottom-line by casting off loss-making thermal generation, upstream activities and the burden of its state-sanctioned nuclear shutdown. But the government plans to close a legal loophole which will keep the costs of nuclear dismantling on Eon’s books indefinitely.
Eon’s share price fell 5 per cent within the first half hour of trade after the announcement was made and now stands almost 30 per cent below its trading value on the first of September.
It’s a chilling warning for other energy companies that the planning is the easy part.
RWE
The second-largest German utility faces the same hostile market environment as rival Eon, and has admitted that it may follow suit with a radical business split if conditions worsen. In the meantime the utility has hedged its bets on growing innovation in the downstream market. The company sent a team to Silicon Valley earlier this year to investigate the possibility of harnessing distributed generation models including smart meter and smart grid technologies. But will the company have the necessary government support to implement its plans? The German company may struggle in its domestic market which is one of the few European nations to take a slow and cautious approach to residential smart meter rollouts. And in the UK market, the struggle may be in establishing the customer trust needed to play a greater role in British homes. Despite a successful B2B supply business the residential supply unit has consistently appeared at the bottom of the customer satisfaction surveys. The company recently admitted to losing 300,000 customers in a year as profits dived 65 per cent. In addition the company has lost its UK boss Paul Massara, who stepped down “by mutual consent”. If the UK business does manage to hold its share in the retail market the smart meter revolution itself, which is dogged by delays, could hinder its plans further.
Centrica
After a six-month review Centrica announced plans to turn away from its struggling upstream assets and redirect £1.5 billion towards its “strengths” as a customer-facing business. As the parent company of the UK’s largest energy supplier, Centrica’s punt on British Gas may seem like a safe bet. Market analysts welcomed the move as a step in the right direction but the share price nonetheless crashed as the market took on board the sheer scale of change required by the company. And operating in the hotly politicised consumer market will pose its own challenges. From the much-criticised smart meter rollout and lingering concerns of a cost of living crisis, Centrica will also need to negotiate a revived appetite for renationalisation following Jeremy Corbyn’s successful Labour leadership bid. But perhaps the greatest threat to British Gas as the country’s largest supplier would be a CMA price intervention. Centrica has admitted the company could face “material impacts” on profits if plans to control standard variable tariffs are put in place.
SSE and Scottish Power
The Scottish utilities have signalled a shift away from coal-fired generation towards cleaner assets – but both will remain reliant on hand-outs from either government subsidies or National Grid contracts to remain economic. In May this year SSE said it will react to the changing UK energy landscape by reshaping its asset portfolio in favour of its cleaner, more flexible generation capacity with more gas-fired power, which could receive financial support through the capacity market or National Grid contracts. Without a supportive supply-side regime thermal generation will continue to make meagre profits as evidenced by the closure of SSE’s 1GW Ferrybridge coal-fired power plant and Scottish Power’s Longannet coal-fired plant which failed to secure a supply contract with National Grid. Iberdrola-owned Scottish Power also faces an uphill battle in its bid to press forward with on- and off-shore wind power deployment after the anti-renewables Conservative government came to power and issued a raft of cuts to wind power support. In the retail market the companies will face different challenges. As with British Gas, SSE’s large customer base means the company is similarly exposed to the risk of a CMA tariff intervention. Meanwhile, Scottish Power is hemorrhaging customers as faulty billing systems caused service standards to take a hit at the same time that independent suppliers are increasingly taking market share.
EDF
EDF’s fleet of nuclear reactors has until now served to insulate the energy company from volatility in the gas markets and the rising cost of carbon emissions. In fact, the company stands accused of securing windfall profits through the UK’s capacity market which was supposed to focus on new build gas-fired power rather than existing nuclear units. But its strength as a nuclear developer has recently come into question following spiralling costs of its Flamanville European pressurised reactor (EPR) project in France. Delays are also expected for the Hinkley project which has yet to achieve a final investment decision. EDF has admitted that in the current climate it would not be able to afford the investment without help from its Chinese development partners. Although the Chinese will partner with EDF on the Hinkley project it could soon emerge as a more effective nuclear rival. The Chinese are keen to establish the country as a key nuclear player and in the UK is also expected to develop its own reactor design at a separate site in Essex in order to prove its mettle.