An advert was placed discreetly in the Financial Times the week before last for a new chief executive for Ofgem, but after Ed Miliband’s declaration of his “solution” to all our energy problems, who would want the job?
Miliband has issued a clarion call for price controls of energy prices for the two years after an (anticipated) election victory in 2015, but as with all these things, it’s not that simple.
The true cost to serve, or supply if you prefer, an electricity customer is the sum of a series of individual costs, from fuel, through generation, distribution, billing and funding, plus a profit margin. The margin of supplying power to a retail customer is pitifully low in the UK – somewhere around 2 per cent. In a regime where the end user price is frozen (and at what price we don’t know yet) and the cost to serve exceeds that price, then the supplier will be making a loss.
In France, when electricity price controls were imposed by the French government a few years back, the loss was borne by the utilities – EDF and GDF Suez – and their shareholders, effectively the French state. In Spain, where again government price freezes were imposed (and still exist?) the loss has been capitalised on the balance sheets of the major utility suppliers – Iberdrola, Gas Natural Fenosa, Endesa– to be repaid at some point by customers through higher tariffs. As of this week, the total “tariff deficit” exceeds €30 billion.
So I wonder, if Miliband does take power (apologies for the pun), could electricity and gas price controls in the UK be the ultimate force majeure for the UK utility model as we know it today?
Were it not for the public supply obligation, I suspect some utilities would have sold their retail books by now and concentrated on generation and wholesale supply. Shareholders will be scrutinising the potential for losses and persuading boards to consider some hard decisions. As for customers, do we really mind if we buy our electricity and gas along with our groceries from pure retailers, say Tesco, Sainsbury’s and Asda?
This makes me wonder if the new chief executive of Ofgem will actually preside over a completely transformed sector, where prices are fixed by the government and where we buy our electricity and gas from anyone other than a power company.
If that is so, then Miliband may have set in train a complete restructuring of our power and gas sector. And rather than aiming to become our new prime minister, perhaps he is the one destined to be the head of Ofgem.
Nigel Robinson, Investec