British Gas owner Centrica is expected to report a dip in profits after being hit by the price cap when it posts its preliminary results on Thursday (13 February). There is also speculation that Sarwjit Sambhi, who heads its consumer business, is the front-runner in the contest to take over from Iain Conn as chief executive.
Utility Week takes a look at these and other stories from the weekend.
Energy price cap burns a hole in Centrica profits
Centrica, the owner of British Gas, is expected to report a drop in profits after being hit by the government’s price cap on energy bills and lower wholesale gas prices.
The troubled FTSE 100 group is expected to report that adjusted operating profits fell to less than £1 billion in 2019, from £1.4 billion a year earlier.
It has warned that the price cap, which forced it to cut tariffs for millions of customers, is likely to knock profits at its British Gas household supply division by £300 million. Profits at its exploration and production unit are also expected to have collapsed after gas prices slumped across Europe.
Centrica, which is seeking a new chief executive to replace Iain Conn, supplies gas and electricity to about seven million UK households through British Gas, operates a home services division and also supplies homes and businesses in North America.
It owns a 20 per cent stake in Britain’s ageing nuclear plants and a controlling stake in Spirit Energy, a North Sea oil and gas business, but is looking to offload both. Mr Conn, 57, presided over a 70 per cent drop in the share price since taking the job at the start of 2015 and agreed last July to step down this year.
City sources say an announcement of a new chief executive at this stage looks unlikely, although not impossible. Sarwjit Sambhi, head of the consumer business, and Chris O’Shea, chief financial officer, are believed to be the leading internal candidates for the role.
Centrica’s core British Gas business has been hit hard by the cap and fierce competition from cut-price new entrants. The company, which employed about 30,000 people as of the end of 2018, has been slashing thousands of jobs to try to reduce its costs and improve efficiency. Further job cuts are expected this year.
The Times
Centrica’s new insider boss faces debt struggle
Centrica is preparing to appoint an insider as its new chief executive, as the British Gas owner struggles to tackle its debts by selling off its fossil fuel and nuclear arms.
Sarwjit Sambhi, who heads its consumer business, is the front-runner in the contest to take over from departing chief executive Iain Conn, industry sources say.
Centrica’s hunt for a new leader has focused on in-house candidates after a trawl of external executives proved fruitless, insiders said. The job is seen in the City as a tough task under close public scrutiny, as the company implements thousands of job losses following a string of profit warnings.
Mr Sambhi’s rivals have included Richard Hookway, a former colleague of Mr Conn’s from BP who leads Centrica’s business-to-business division. Chris O’Shea, the chief financial officer, and Richard McCord, finance director for corporate business, are believed to have applied, but are seen as outsiders.
Mr Sambhi, a Cambridge-educated engineer who has worked at Centrica for close to 20 years, was this weekend believed to be the preferred candidate. There is speculation at Centrica that an announcement could be made on Thursday alongside full-year results.
He has been on Centrica’s board for less than a year, but analysts say he is a strong contender, having run British Gas, amid Centrica’s plans to focus on its consumer business.
The company has been attempting to offload oil and gas assets as part of that strategy, including Spirit Energy. The North Sea explorer, which produces the equivalent of about 130,000 barrels of oil per day, went on the block last year.
Centrica is trying to sell for cash while Spirit’s joint owner, the German utilities giant SWM, could remain invested with a new partner.
City and industry sources said the pair could struggle to achieve the £1.5bn price tag for Spirit due to potential decommissioning costs connected to the ageing Morecambe Bay field, and depressed oil prices.
Centrica’s new boss will also have to contend with the sale of its stake in Britain’s fleet of nuclear power stations. Negotiations over the 20pc holding in eight ageing nuclear reactors have stalled, sources say, after interest from fund manager Dalmore emerged last year.
Talks have not collapsed, but a deal remains some way off. It is understood that Greencoat, a £4bn energy fund, has emerged as a rival bidder, but its offer to float the fleet on the stock exchange is considered riskier than a direct sale to Dalmore.
Centrica has been considering a sale of its entire stake in the £6bn reactor fleet since 2013, but has struggled to find a buyer after revelations about the plants’ rapidly declining health.
Steve Thomas, emeritus professor of energy policy at Greenwich University, said: “The lifetime availability of these nuclear plants is pretty much the lowest in the world.”
According to Prof Thomas’s research, three of the reactors have serious safety problems, and will need to be closed in the next few years, making them much less attractive to potential buyers.
“Hunterston is on its last legs, and will be dead by 2023,” he said, in reference to 300 cracks that have appeared on the reactor’s graphite core.
A number of other reactors in the fleet, which Centrica jointly owns with French energy titan EDF, also have safety problems involving their graphite moderators.
The Telegraph
Gas boilers could be banned from all homes to ensure the UK meets carbon neutral target by 2050
Homeowners could be forced to replace their gas boilers to ensure the UK meets its target to be carbon neutral by 2050, ministers are warning.
The Government will publish a White Paper later this year which will set out the “bigger decisions” that the UK has to make to meet the target.
Lord Duncan of Springbank, the Climate Change minister, said that the White Paper will consider whether the Government should ban gas central heating altogether from all homes.
It is not clear if homeowners will have to pay for this new strategy – which is planned to be introduced incrementally over the next decade – and whether there are enough plumbers to carry out the work.
It comes after Ofgem, the gas regulator, said last week that Britain will have to change “the way homes and businesses are heated” to ensure the UK can hit its target.
The Government will set out the radical plans in the months leading up to the COP 26 environmental summit in Glasgow later this year.
Last June the UK became the first major economy in the world to pass laws to end its contribution to global warming by 2050.
Lord Duncan said that to hit this target the Government was now looking at a new “domestic decarbonisation approach” to hit the target.
He said “There will be an overarching energy White Paper that will look at the bigger decisions that we have to take. Decarbonising domestic heating will be a real challenge. Shall we electrify the entire grid?
“If we do so, bearing in mind that electricity tends to be more expensive, we need to address fuel poverty head on if that is the case. Or are we looking at putting hydrogen into the grid in a hybrid or pure form?
“We will resolve that question this year. We will make a decision to determine that and to support the way forward.”
He added: “We will need to do so in tandem with fuel poverty; again, there is no point in decarbonising while making people cold and sick. We need to make sure we go hand-in-hand with that just transition for all the people.”
The news comes after hybrid car owners were given a “kick in the face” by ministers, motoring bodies have said, as they warned that the surprise decision to ban the vehicles from sale in 2035 will “backfire”.
Lord Duncan also warned that forcing motorists to ditch petrol cars and buy electric vehicles would be difficult because they are too expensive.
He told peers: “We need to look at a decarbonising strategy ‘inside’ transport. There, we have a challenge that will not be easy to meet because, in truth, most people do not have an electric car, and we are nowhere near the tipping point where that car will become affordable.
“Again, we need to find that tipping point and we have a strategy coming out in order to help us deliver that.”
Last week Andrea Leadsom, the Business secretary, said that she wanted “to set a clear steer for every part of our economy during the course of this year that sets out our ambition in wanting to lead the world in tackling climate change”.
A source at the Business, Energy and Industrial Strategy said that ministers would publish this year a “roadmap for heat policy which will set out the steps required to make key decisions on heat decarbonisation in the 2020s”.
It said that there “are a number of options that could play an important role in decarbonising heat, including heat networks, heat pumps, hydrogen and biogas.
“Given the diversity of heat demand, no one solution can provide the best option for everyone – a mix of technologies and customer options will need to be available to decarbonise heat at scale.”
The Telegraph
Households offered perks to go green
Home owners are to be given subsidies to reduce their carbon footprints under budget plans to help Britain to hit its 2050 net zero target.
Under proposals being considered by Sajid Javid, the chancellor, the Treasury is looking at a scheme to “share the cost” of upgrading homes to reduce carbon emissions. It is part of a drive in Whitehall to “carbon-test” new policies to ensure that they contribute — or do not negatively affect — the government’s pledge to hit the 2050 target.
Green proposals under consideration in the budget include extending and possibly increasing subsidies of £3,500 on new electric vehicles that are due to run out next month; paying to make social housing, schools and hospitals meet minimum targets on energy efficiency; and incentives for other households to improve energy efficiency, such as phasing out gas boilers and installing solar panels.
A Conservative source said that Mr Javid wanted to make measures to tackle climate change a key part of his first budget in the year that Glasgow hosts Cop26, the UN climate change conference. No decisions have been taken, but the source said that ministers were aware that the country was behind schedule in its commitment to be carbon neutral by 2050.
“At the moment, we’re not where we need to be with just nine months to go before we’re going to be at the centre of world attention,” the source said. “The sacking of Claire Perry O’Neill was disastrously handled and there is a lot of pressure to show that we ‘get’ this.”
To meet its target, the government aims to alter homes so that all reach energy performance band C by 2035. Only about 30 per cent of homes do so at present. The government is expected to commit about £9 billion to the scheme, alongside another £500 million to help energy-intensive industries to move to low-carbon techniques. Ministers expect the target to create about two million jobs in the sector over the coming decades.
No decision has been taken on how generous the help to households should be. One idea being considered is resurrecting the coalition government’s “green deal improvement fund”, under which households were eligible for more than £5,000 cashback for installing energy-efficient measures. The scheme has been suspended since 2014 because of the cost to the Treasury.
Joanna Furtado, of the Green Alliance, said that Cop26 was a “massive opportunity” to show global leadership, but she warned that it could backfire unless the budget were used to make early substantive commitments. “The UK is off-track right now for the 2050 target and this has got to be the year to address that and that means we need to see clear action across a range of areas in the budget,” she said.
A government source said that the budget would be a first step towards what would be a long-term and radical programme to move the nation away from carbon emissions. The source said that in future all policies would need to be tested against the 2050 pledge and the extent to which they were carbon neutral in the long term.
The Times
EDF closes in on £110m deal to buy electric car charging firm Pod Point
French energy supplier EDF is set to snap up one of the UK’s largest electric vehicle operators for £110m, i understands.
Pod Point operates more than 1,700 public vehicle charging bays across the UK, including at hundreds of Tesco stores around the country. The sale would give EDF a significant foothold in the UK electric vehicle market, which is tipped for explosive growth in the coming years.
A majority of Pod Point’s shareholders have already indicated they are willing “in principle” to accept the offer, according to document seen by i. The proposed deal would be to acquire all the shares in the firm, giving EDF absolute control over Pod Point.
Shareholders are set to be paid just over 23 pence per share, with an extra 11 pence per share to be paid within two years as long as no uninsured claims are made against the business.
Talks over a potential sale have been ongoing between the two parties since autumn last year. If the sale goes through, it will be EDF’s second major chargepoint acquisition in six months. In November it acquired British start-up Pivot Power, which develops battery storage sites for charging electric cars.
EDF and Pod Point both refused to comment on the deal.
inews
London market passes first post-Brexit test with £1.3bn listing
Britain has passed its first big test of post-Brexit investor sentiment, with Calisen Group successfully listing on the main London market at a £1.3bn valuation in the biggest European flotation of the year so far.
The smart meter company, backed by US buyout group KKR, raised £328.8m by listing on the London Stock Exchange with a share issue at 240p apiece — just below the midpoint of its initial range of 225p to 265p. Shares moved higher in early trading. It was the largest UK domestic float since Trainline’s £1.1bn share sale last June.
Calisen’s float bolstered hopes of a revival in London initial public offerings, which had ebbed to the lowest level since the 2009 financial crisis. Just 34 companies joined the London Stock Exchange last year, less than half 2018’s total, with new equity raised shrinking from over £6bn to just £3.7bn, LSE data show.
Brexit uncertainties and sterling volatility have taken the blame for choking off the flow of new issues, as well as for UK market underperformance that made other venues more attractive for raising fresh capital. The FTSE All-Share gained just 14.2 per cent in 2019 while most US, European and global stock benchmarks all advanced by around 25 per cent.
“There is little suggestion the pipeline of companies ready to go public had slowed — it was more that political conditions didn’t support decent liquidity and valuations,” said Simon French, chief economist at Panmure Gordon.
“There’s always a reason to delay a public offering if you look hard enough . . . But domestic uncertainty in the UK has undoubtedly pulled back from the elevated levels of the last few years. This makes it easier for firms looking to come to market and attract an investor base that is looking for added exposure to UK assets, having been underweight for a number of years.”
Globally, flotations have been getting more scarce as cheap debt financing and a glut of private capital have pushed back the need for companies to go public. The increasing influence of passive investment strategies may also have depleted the number of active fund managers able to support flotations.
The company is better known for one of its business units, Calvin Capital, leases smart meters to utility companies that then fit the devices in homes. It receives a monthly rent for 10-15 years as long as the device remains in a property.
The Financial Times
Babcock, chaired by Ruth Cairnie, faces new contract wrangle over nuclear power station clean-up
Support services giant Babcock International could suffer a fresh blow as a contract to decommission Scotland’s oldest nuclear reactor is taken back in-house by the state’s agency.
Cavendish, a division of Babcock, runs Dounreay in a joint venture with American engineering companies Aecom and Jacobs. The deal was signed in 2012 and runs until the 2030s.
However, the Nuclear Decommissioning Authority (NDA), a government-funded body that manages the clean-up of Britain’s ageing nuclear sites, is understood to be considering stripping the company of the contract.
Ministers tore up another Babcock nuclear contract — for the decommissioning of former Magnox sites — after a judge ruled in 2016 that the procurement process had been “manipulated” and “fudged” by the NDA. It was taken back in-house and is expected to be divided into smaller contracts. Ministers then set up an independent inquiry into the botched £6bn deal, led by former National Grid boss Steve Holliday, but the outcome has yet to be published after a long delay.
Babcock, chaired by former Shell executive Ruth Cairnie, has endured a rocky period and a heavy fall in its share price. Last week it announced the departure of boss Archie Bethel, as well as the exit of three non-executive directors.
It has about 35,000 staff, and offers services ranging from maintaining warships and submarines to providing helicopters to the emergency services. Its civil nuclear division generated £698.3m of sales and £64.2m of profits in the year to March.
The Sunday Times
UK water groups weigh Ofwat settlement options
England and Wales’ privatised water companies will decide this week whether they will appeal to the competition regulator over their financial settlements.
Thames Water, Northumbrian Water and Yorkshire Water are among groups weighing their options at crunch board meetings set to be held before the appeals deadline on Saturday.
If one or more of the companies does appeal, it will be the first time in two decades that the regulator Ofwat has faced a challenge from a large water and sewage services provider. South West Water appealed in 1994, and since then only Bristol Water has appealed, although it has contested its settlement three times.
Of the 17 water companies just three have publicly accepted the settlement so far — the two listed companies Severn Trent and United Utilities, and Wessex Water, which is owned by the Malaysian power company YTL Corporation.
The settlement covers how much water companies can charge customers and how much they must spend on infrastructure such as mains pipes and sewage treatment over the next five years.
Ofwat has told the 10 large regional water and sewage companies and seven smaller water suppliers to lower debt levels and cut household bills by an average of £50 per household from April. Some of that will be absorbed by inflation.
It has also required the utilities to invest the equivalent of £6m a day — or £51bn in total — over the next five years in plans to reduce pollution and leakages on and increasingly stressed infrastructure after a series of flooding and sewage incidents.
Although Ofwat believes that infrastructure and service improvements can be delivered for less money, some of the water companies have accused the regulator of prioritising bill cuts over the need for greater investment in leakage, sewage treatment and resilience to address public concerns.
If they decide to appeal, the process can take up to a year, during which time they are forced to abide by the existing settlement. After companies notify Ofwat, it then refers the decision to the Competition and Markets Authority.
One senior executive said that “everyone was waiting to see what everyone else was doing first”. “This is uncharted territory for the water companies and there could be a reputational cost,” he said.
Share prices at the three listed companies have been rising in recent months. Ofwat’s so-called final determination before Christmas was more generous than expected, while the Conservative win in the general election saw off the immediate threat of renationalisation from the opposition Labour party.
Colm Gibson, managing director of Berkeley Research Group, said that Ofwat had introduced a number of “significant and largely unprecedented changes” to the price control framework that had left companies and investors with a “particularly tough decision to make”.
The Financial Times
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