In our latest round-up of the weekend’s national news coverage, Ofgem’s decision to raise allowances for suppliers is tipped to boost British Gas profits while Grant Shapps vows to ‘max out’ UK’s North Sea oil and gas reserves. Elsewhere, trade groups demand Ofgem tackle energy brokers ‘ripping off’ small firms and Moody’s cuts the credit rating of Thames Water’s parent company Kemble.
British Gas poised for record profits after Ofgem’s hike in price cap allowances
British Gas is expected to post record profits this week, powered by Ofgem’s decision to temporarily raise allowances for suppliers in the price cap.
The UK’s largest energy firm, which is home to over nine million customers, is on course to report a massive boost in its earnings over the first six months of trading this year, when its owner Centrica unveils its second quarter results on Thursday.
Such hefty earnings would surpass British Gas’s previous record profits of £585m set in 2010.
Centrica is also expected to sustain its own robust earnings, having recovered from pandemic driven losses – when it posted a £135m loss in 2020.
This follows Ofgem’s decision to hike allowances for suppliers, which are factored into the price cap level to help suppliers cover the cost of supplying energy to consumers, with the aim of supporting market stability.
Previously, these allowances have been raised to recognise rising wholesale market prices caused by exceptional events such as the Covid-19 pandemic and the Russian invasion of Ukraine.
The watchdog has recognised that the price cap was not adjusted in time to ease pressure on suppliers when wholesale costs soared during the energy crisis – which contributed to the collapse of dozens of firms including the de-facto nationalisation of Bulb Energy.
Ofgem is now considering tightening allowances in line with falling gas prices, meaning suppliers could have to hand money back to customers.
As part of a carrot and stick approach to bolstering financial resilience across the sector, the regulator is also weighing up proposals to raise the fixed 1.9 per cent margin for profits, with a variable rate of around 2.4 cent margins from October.
This would provide a welcome boost for suppliers, which have struggled to turn profits in the past few years, because they have had to shoulder the higher wholesale costs to supply households with energy.
The effect of Ofgem’s reforms to the price cap could also be reflected in second quarter results later this week from French energy giant EDF and Scottish Power owner Iberdrola.
Martin Young, equity and utilities analyst at Investec, predicts that British Gas’ massive profits will inevitably trigger “a media frenzy about energy prices.”
Investec expects higher prices for energy bills will persist well into next year, prolonging the cost-of-living crisis, with the price cap still nearly double pre-crisis norms.
Young forecast that the typical household energy bill will remain around the current level at around £2,000 per year through the third quarter of 2024.
While this is “slightly lower than our previous estimates, it’s hardly a respite,” he argued.
Cornwall Insight has also predicted the price cap will remain well above pre-crisis levels into next year, prolonging the country’s cost of living crisis.
City AM
Grant Shapps vows to ‘max out’ UK’s North Sea oil and gas reserves
Grant Shapps, energy minister, has insisted that the government will “max out” the UK’s remaining reserves of North Sea oil and gas, arguing this is compatible with Britain’s pledge to reach net zero carbon emissions by 2050.
Labour leader Keir Starmer has said the UK will grant no new North Sea licences if his party wins the next general election, but would not revoke existing contracts.
In an interview with the Financial Times, Shapps described the Labour policy as “madness”, and said licences should be granted for all viable oil and gasfields so long as this was consistent with the net zero ambitions.
“What Labour foolishly and irresponsibly want to do is deliberately pursue a policy of self-harm by not taking that oil and gas but buying it from abroad,” he said.
Even if the industry “maxed out” all potential North Sea contracts, he said, there would still be a rapid slowdown in production because it was a mature basin that was running out of hydrocarbons.
“The IPCC , who is the global authority on this, says that to meet net zero by 2050 the world needs to reduce its reliance on oil and gas by 4 per cent a year,” he said.
“Even if we granted every single conceivable licence to the North Sea . . . the would decline at 7 per cent a year, twice the rate of the IPCC .”
Shapps argued that the alternative to using British hydrocarbons as the UK transitioned to a greener economy was to import fossil fuels from abroad, which typically involved more carbon emissions.
This would leave Britain at the mercy of “Putin or anyone else who wants to hold us to ransom”, he said, referring to the Russian president whose invasion of Ukraine caused global oil and gas prices to surge.
The UK has phased out Russian oil and gas imports, continuing to import from suppliers including the Netherlands, Saudi Arabia and the US.
“There is no option but to carry on buying this stuff, I don’t understand why it’s acceptable to buy oil and gas and LNG . . . from all these other nations while denying ourselves the ability to service our own people and economy,” he said.
“And even worse, do it at a higher expense and twice the carbon emissions. It simply doesn’t make sense.”
Ed Miliband, shadow energy secretary, said the Tory government had left Britain vulnerable to the recent global energy crisis triggered by the Ukraine war.
The Labour MP argued that Shapps’ pro-extraction approach would not reduce bills nor improve energy security, while “driving a coach and horses” through Britain’s climate commitments.
“Every respected expert, from the International Energy Agency to the Climate Change Committee has warned the government of the dangers of this policy,” he said.
The Office for Budget Responsibility, the fiscal watchdog, said in its risks report this month that “continuing our dependence on gas at the current level could, in an adverse scenario, be as expensive fiscally as completing the transition to net zero”.
British academic Rachel Kyte, dean emerita of the Fletcher School at Tufts University, criticised the “bizarre” statements coming from ministers on fossil fuels, warning the UK was at risk of missing an opportunity to attract investment and create jobs through the energy transition.
“The government seems unable to grasp that future prosperity lies on staying at the leading edge of the clean energy transition, which is well under way,” she said.
Philip Evans, Greenpeace UK climate campaigner, called Shapps’ plan “scaremongering nonsense” given Labour was not proposing an “immediate shutdown” of the industry.
But David Whitehouse, chief executive of Offshore Energies UK, the oil and gas trade group, said that 200,000 high-value jobs were at risk from shutting down the North Sea industry.
“The figures are clear: the UK has 283 active oil and gasfields but 180 will shut down by 2030. If we don’t replace them with new ones, then production will decline much faster than we can build low-carbon replacements,” he said.
“There is no simple choice between oil and gas on the one hand and renewables on the other. The reality is that to keep the lights on and grow our economy, we need both.”
Financial Times
Trade groups demand Ofgem tackle energy brokers ‘ripping off’ small firms
A coalition representing 1m small businesses is urging the energy regulator to crack down on the rogue energy brokers who rip off firms, charities, care homes and faith groups by piling billions of pounds in hidden commission fees on to bills.
The business groups have written to Ofgem demanding it force gas and electricity suppliers to disclose how much they are paying the intermediaries who market deals on their behalf.
The trade associations claim that these secret commissions have inflated energy bills and compounded the cost crisis facing the small business sector, which employs almost 13 million people across the UK.
“We cannot afford to wait for further reviews on this issue,” said the letter. “We have the support of some of the biggest voices representing the UK’s most hard-hit sectors. If you continue to fail the business community by allowing this exploitation to continue, we will raise this direct with government.”
The letter, seen by the Guardian, has been signed by chief executives from UKHospitality, Care England, the British Retail Consortium, the Federation of Independent Retailers (FIR), the Association of Convenience Stores, British Independent Retailers’ Association, the Independent Care Group and the National Council for Voluntary Organisations.
Muntazir Dipoti, the national president of the FIR, said many of its members were struggling to stay in business.
“It is, therefore, critical that Ofgem takes action against these hidden charges to prevent even more retailers being left severely out of pocket,” he said.
The Confederation of British Metalforming wrote a letter earlier this year to the energy security secretary, Grant Shapps, seen by the Guardian, which described the situation as the “biggest mis-selling scandal since PPI ”.
It follows warnings from the Federation of Small Businesses and the British Chambers of Commerce that about a quarter of the UK’s small businesses are now locked into poor value energy deals that were struck when gas and electricity prices were at their peak at the end of last summer.
Almost a third of companies with a business energy supply contract use a broker to secure it, but unlike the intermediaries who market mortgages or insurance deals these energy middlemen are largely unregulated.
Lawyers at Harcus Parker and Leigh Day, which have launched class action lawsuits against energy suppliers, believe that in some cases secret broker commissions may have doubled small business energy bills. They have said that small businesses may have the right to claim back up to £2bn in hidden commissions.
Damon Harcus, who founded Harcus Parker, said: “The malpractice is so widespread, and it’s coming to light at a time when fuel costs are often what determines whether a company can survive. We have 5,000 companies which have come forward so far, and that number is growing.”
He added: “The regulator seems to believe that they can’t regulate brokers, or they shouldn’t. But it would be the easiest thing in the world to insist that suppliers are open about the commissions they pay. Failing to do so has given rise to an improper industry.”
Ofgem has promised for at least 10 years to take action against brokers who lock companies into poor value deals. After its latest review, in 2020, the regulator said it would force suppliers to disclose how much they were paying brokers in commission – but only for so-called “microbusinesses” of nine or fewer employees.
Business groups are calling for the regulator to extend this protection to larger small and medium businesses.
Ofgem said it had “listened loud and clear to calls to protect businesses of all sizes from sharp practice by energy brokers”.
A spokesperson said Ofgem had completed “the most detailed ever review” of the business energy market and would set out “a comprehensive package” of new proposals to tackle poor behaviour by energy suppliers later this week: “This will include immediate actions we can take within our existing rules and where we might need stronger powers.”
The Guardian
What does the scrapping of a wind farm plan mean for UK renewable energy?
Work has stopped on one of the UK’s largest offshore wind farms after its developer said it no longer made financial sense to continue.
The government has a target of doubling wind capacity by 2030 and a policy of hitting net zero by 2050 – so what does the decision mean for the UK’s renewable energy industry?
What has happened and why?
Swedish energy giant Vattenfall has announced it is to shut down development of the Norfolk Boreas site, off the Norfolk coast.
It was awarded one of the government’s Contracts for Difference (CfDs) for the first phase one of the biggest offshore wind zones in the world last year.
CfDs effectively guarantee a fixed price for the electricity produced for 15 years. It meant that if prices were low, the companies would get a subsidy. If prices rise, the gains must be paid back.
But Vattenfall said it had seen its costs, driven by inflation, supply issues and rising wages, soar by 40%.
The money the government had agreed to pay them, the firm said, would not cover these increased costs.
Chief executive Anna Borg said: “Conditions are extremely challenging across the whole industry right now, with a supply chain squeeze, increasing prices and cost of capital, and fiscal frameworks not reflecting current market realities.”
What does it mean for other projects?
The Swedish energy giant blamed market conditions for its decision to shelve the Norfolk Boreas plan
The company said two other Norfolk sites – known as Vanguard East and Vanguard West – will be reviewed.
Vattenfall said it remained committed to the region and was “evaluating the best way forward for all three projects in the Norfolk Zone”.
“We have attractive wind power projects in the pipeline, and investment decisions will always be based on profitability,” the company said.
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The BBC
Moody’s cuts Thames Water credit rating, issues new warning
Moody’s cut the credit rating of Britain’s Thames Water on Friday and warned it could do so again if the sector’s regulator took further action against the firm and it struggled to improve its finances.
Moody’s said it downgraded Thames Water to B2 from B1 and maintained a negative outlook.
The ratings firm added the cut reflected the risk that Britain’s water regulator Ofwat could impose a “dividend block” on the company due to its finances and the increased public criticism for relentlessly dumping raw sewage into rivers.
That in turn would weigh on “lender appetite” in the context of forthcoming refinancings, “likely to the detriment of the availability and cost of capital” for Thames Water’s holding company.
Further equity injections by shareholders would also be subject to conditions and may fall short of what is needed to underpin the company’s credit quality, Moody’s added.
Thames Water was not immediately available for comment.
Reuters
Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.