The general election manifestos are out. And for the utility sector at least, the outcome of the next election looks like it will be a “Nightmare on Downing Street”.
The two big parties vying for government have used their manifestos to indulge in an auction on who can crack down hardest on energy companies.
Early in her premiership, Theresa May signalled that she had the utilities in her sights. And last week’s manifesto confirmed this with a pledge that the Conservatives would “extend” the existing cap on prepayment meter bills to “more customers on the poorest value tariffs”. For good measure, the Tory manifesto says that micro-businesses would also see their energy bills capped.
The clampdown on energy prices is part of a wider land grab by the Conservatives of Labour’s traditional political turf, and appears calculated to win over traditional supporters of their opponent who feel alienated by the party’s recent hard left turn.
By planting their flag on Labour territory, first mapped out with Ed Miliband’s promise to freeze energy bills at the 2015 general election, the Tories have dared the opposition to go further.
Jeremy Corbyn’s Labour has duly obliged by promising to introduce an “immediate” emergency price cap to keep average dual fuel household energy bills below £1,000. The cap would remain in place during what the opposition describes as a “transition to a fairer system”.
To emphasise its radical credentials, Labour threw in a pledge to return energy grids to public ownership “over time” by allowing the publicly-owned local companies to purchase regional infrastructure. The manifesto also included regaining control of energy supply networks by altering the national and regional network operator licence conditions.
Labour’s nationalisation plans have left employers “shocked”, according to the CBI.
The business umbrella body’s director-general, Carolyn Fairbairn, says: “Major interventions or structural changes to open markets could have unintended consequences, hitting investor confidence and dampening consumer willingness to shop around for the best deal, in the case of the energy market.”
However, given the Conservative poll lead, the greatest concerns are reserved for the Tory price cap plan, given that it is much more likely to be implemented.
Some observers have drawn comfort from the ambiguous phrasing of the price cap policy in the manifesto, with its talk about extending safeguards to “more” customers.
This has raised hopes that the government will not introduce the kind of blanket price intervention that May’s recent Sun column indicated was on the cards. And there is no repeat of earlier promises to cut standard variable tariffs by £100.
There is also a nod in the manifesto towards the continuing importance of competition, which says the government will support initiatives to make the switching process easier and more reliable in the retail energy market.
Utility Week understands that the ambiguous wording of the price cap pledge reflects continuing tensions within the government over how to proceed with the cap. May and her policy chief, Nick Timothy, have both publicly backed government intervention on pricing levels, but more free market voices in the Cabinet oppose this stance
A Conservative source says: “An absolute cap would distort the market and big suppliers will congregate around that level.”
Greg Jackson, chief executive of Octopus Energy, says a fixed cap would be too blunt an instrument: “If wholesale prices drop, consumers aren’t provided with any benefit. If they rise, you could end up with a perverse situation where all companies are supplying consumers at a loss. Any form of cap needs to be flexible.”
One way of meeting the Conservative manifesto proposal could be to pick up Citizens Advice’s proposal to limit price caps to those vulnerable enough to qualify for the Warm Homes Discount.
Jackson believes the wording of the Conservative manifesto also leaves the door open for the idea of a relative price cap championed by Conservative backbencher John Penrose in the run-up to the general election.
“It’s so important that the industry comes up with a good solution for the government. For those that want more transparency and competition in the market, this is a massive opportunity,” he says.
“We now need to work constructively with the big six on the best solution,” says the Tory source.
The government’s mooted review of energy costs provides an opportunity for these tensions to be teased out away from the febrile environment of a general election campaign.
There is also potentially scope to introduce into the mix other factors such as greater support for energy efficiency, which may more successfully bring down bills in the longer term.
However, Jackson urges the government not to use the review to kick rising energy prices into the long grass. “I hope government will have a quick but thorough analysis rather than a long drawn out investigation, so that consumers don’t have to wait,” he says.
Manifesto matrix
PRICES
Conservatives
Extend price cap for customers on prepayment meters to more customers on “poorest value tariffs” and to micro-businesses. Launch review of energy costs.
Labour
Immediate’ emergency price cap to keep average dual annual fuel household energy bill below £1,000 en route to establishment of a “fairer system”.
OWNERSHIP
Conservatives
No mention
Labour
Bring the energy grids back into public ownership “over time” with legislation to allow publicly owned local companies to purchase regional infrastructure. Regain control of energy supply networks by altering the national and regional network Operator licence conditions.
RENEWABLES
Conservatives
Maintain existing opposition to onshore wind in England but relax stance on projects in remote islands of Scotland and explore ways of harnessing Welsh natural power generation resources.
Labour
Sixty per cent of the UK’s energy should be generated from low carbon or renewable sources by 2030 and support development of tidal lagoons. Renewable energy projects would be a priority for a proposed £250 million National Investment Bank.
ENERGY EFFICIENCY
Conservatives
Establish an industrial energy efficiency scheme to help large companies install measures to cut their energy use and bills.
Labour
Insulate four million homes, with homeowners offered interest-free loans to install insulation; energy efficiency standards for rented homes upgraded; and the Landlord Energy Savings Allowance re-established.
FRACKING
Conservatives
Support development of shale industry in Britain with a shake-up of planning laws. Decisions on major shale schemes would be taken at a national level and test drilling would be treated as permitted development, not requiring full-scale consent. Residents of communities hosting fracking schemes will be offered a share of any profits generated.
Labour
Ban
NUCLEAR
Conservatives
No specific mention.
Labour
Support new nuclear projects, ensuring that the technology will remain part of the UK’s energy supply.
The other parties
Of the three big national parties, only the Liberal Democrats break the emerging consensus that capping is the answer to energy prices.
The Lib Dems say average heating and lighting bills are “too high”, but their manifesto continues to put faith in competition. They declare that at least 30 per cent of the household market should supplied by competitors to the big six by 2022.
The long-term solution to rising bills, according to their manifesto, is better energy efficiency. By 2022, the Lib Dems promise to bring four million homes up to the Band C energy rating, which they believe should be the long-term benchmark for all of the nation’s housing stock.
In addition, the Lib Dems say they would restore the zero-carbon standard for new homes and extend it to non-domestic buildings by 2022.
Plaid Cymru’s manifesto pledges to cut the bills customers’ bills in Wales by establishing a Welsh energy company. They would also transfer responsibility for generation to the National Assembly in Cardiff with the goal of enabling Wales to become self-sufficient in electricity generation from renewable sources.
Analysis
Politics spooks investors
Following the dramatic success of Brexit last summer, politics is once again dominating stock markets. Nigel Hawkins reports.
Already this year, the Dutch have voted while the French presidential election resulted in triumph for Emmanuel Macron.
On 8 June, the UK electorate is once again asked to cast its votes while Germany’s federal elections in September could see the defeat of the EU’s iron lady, chancellor Angela Merkel.
Given this packed list of political events, discerning investors have had to respond and make judgements on likely outcomes.
In the UK, unless the opinion polls are hopelessly wrong, the Conservatives will be re-elected – and probably with a thumping majority. Indeed, virtually all investors in UK stocks have concluded that a Conservative majority is a near certainty.
Consequently, the Labour party’s plans for lower energy bills and nationalisation of key elements of the energy network have so far attracted mainly academic interest.
But energy costs are firmly on the agenda because Conservative party leader Theresa May has confirmed that a price cap will be imposed by Ofgem. Details of how it will be implemented are scarce.
Nonetheless, it has already caused a sharp fall in Centrica’s share price, since both its operating margins and, more importantly, its dividend may be cut. SSE’s share price has also been weak of late. Predictably, from within the energy sector there have been cries about the unintended consequences of such a cap – with further doubts cast on future baseload generation investment.
The Conservative manifesto may also propose additional protection for strategic UK businesses from foreign takeovers, thereby depressing merger and acquisitions activity.
While political turn-ups are hardly unknown – both president Trump and Labour leader Jeremy Corbyn were hardly shoe-ins for their current posts – it really would be astonishing if the Labour party prevailed on 8 June.
Consequently, the chances of a dramatic turnaround in utility share prices are slim.
The remarkable 18 per cent surge in water stocks the day after former prime minister John Major’s surprise win in 1992 does, though, provide a precedent that political turn-ups do impact utility stocks.
Assuming that the overall result on 8 June is broadly in line with current opinion polls, and Theresa May emerges with a strong popular mandate, Brexit negotiations will resume their place dominating the political agenda. Quoted UK utility stocks, except for National Grid, have minimal earnings – unlike EasyJet, for example – from mainland Europe, and are therefore less exposed to developments on the Brexit front.
Elsewhere in the EU, political issues will continue to be very relevant to stock market ratings. Brexit aside, EU investors will be focusing on the first few months of a totally new administration in France, which may result in the relatively unknown president Macron having to govern without a parliamentary majority.
His political agenda is opaque. After all, it could be argued that he was elected because he was not a National Front member, nor was he embroiled in parliamentary expense allegations, nor was he a former Maoist. But importantly for the UK energy market, he is a strong advocate of EDF’s Hinkley Point C investment.
From this summer onwards, the focus will move increasingly to Germany. Following an encouraging win in Schleswig-Holstein, Angela Merkel’s position has been strengthened but she must face down new SDP leader Martin Schulz, an inveterate Eurocrat, in September’s key federal elections.
The tumultuous political arena, not just in the EU but globally, has rattled investors. EY’s latest renewable energy country attractiveness index saw the UK climb back into the Top 10, arresting its four-year slide from 4th to 14th.
However, this is as a result of “other countries falling away – notably Brazil. which cancelled a wind and solar auction in December – rather than any particularly encouraging resurgence”, according to EY’s head of energy corporate finance, Ben Warren.
He adds: “Investors are still waiting for clarity around the post-Brexit landscape. Question marks linger around renewable energy targets, subsidies and connections with mainland power markets. Unfortunately, the likelihood of getting complete answers to those questions before the UK exits the EU are slim.”
This clarity is required, and should become a lot clearer after 8 June, when the new government – whatever its colour – will be able to set out its energy policies and Brexit stance.
In the meantime, UK utility executives will be eagerly awaiting details of the proposed energy cap, which are far more relevant to them than interminable Brexit negotiations.
Nigel Hawkins, director, Nigel Hawkins Associates