£15bn deal for UK Power Networks collapses after owner lifts price
The £15bn takeover of Britain’s largest electricity distributor by a consortium led by KKR and Australia’s Macquarie has collapsed after rising inflation prompted a last-minute price rise by its Hong Kong owner.
Billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, which bought UK Power Networks for £5.5bn in 2010, tried to increase the sale price just two days before an agreement was due to be signed last month, according to two people close to the deal.
The six-member consortium decided the asking price was too high and pulled out of the discussions.
CKI’s decision was the result of the sharp rise in UK inflation, the people said, with currency movements also a factor. UK inflation is currently running at 9.1 per cent, its highest level since the early 1980s.
“It was unusual for the price to be changed at such short notice and after a year of due diligence,” said one person close to the bidders. “The price expectations from the seller massively changed so we exercised cost discipline and walked away.”
Privatised infrastructure assets in the UK — including the electricity, gas and water networks — benefit from rising inflation because their returns are set by the regulator and linked to either the CPI or RPI index. The benefits generally outweigh the costs associated with rising inflation, such as staff, maintenance and materials, as the businesses are not labour-intensive.
Colm Gibson, managing director of Berkeley Research Group, said interest in UK infrastructure assets was likely to remain strong despite UK government threats to impose windfall taxes on parts of the sector such as oil and gas companies and electricity generators.
“Because utilities’ asset values and revenue streams are both indexed to inflation and backed by regulatory guarantees, these industries are regarded as safe havens by investors”, he said. “This is particularly true given the current inflation outlook.”
UK Power Networks is the largest electricity distribution network operator in the UK, transmitting to 8.3mn homes and businesses in the south-east and East Anglia, and earning about a quarter of all revenues in the sector.
The company came under pressure after thousands of customers were left without power during storms in recent months. It is one of six monopoly network companies that operate Britain’s pipes and wires, and derive all their revenues from customer bills, which are soaring as a result of higher gas prices linked to Russia’s invasion of Ukraine.
The cost of the electricity and gas transmission and distribution networks accounts for about a fifth of customer bills, according to Ofgem.
The botched sale took place amid talks between Ofgem and the UK electricity distribution network operators, including UKPN, over how much they will be allowed to charge customers for the five years starting in 2023. Although the regulator has pledged to crack down on profits, experts said this would not have affected either the buyers’ or vendor’s attitude towards the deal.
Appetite for UK infrastructure assets has remained strong because the sector proved resilient to the pandemic at a time when industries such as leisure and retail suffered.
Financial Times
Poor households face having to help foot bill for building Sizewell C
The UK government has been criticised for exposing low-income households to the cost of building the Sizewell C nuclear power plant while letting factories “off the hook” as a crucial planning decision is due this week.
If given the green light, the government hopes to use a regulated asset base (RAB) funding model to finance the project, which is being proposed by the French energy firm EDF.
RAB reduces the risk to investors, who will receive regular payments before the project begins generating power. However, it also means customers pay for the construction costs through higher energy bills.
A consultation on using the RAB model is due to close next month and shows operators in energy-intensive industries would be exempt but households receiving universal credit would have to pay.
In the consultation, officials said the exemption for electricity-intensive users – such as factories – would avoid the risk of putting them at a “significant competitive disadvantage” when operating in international markets as they may have to add the costs to the price of their products.
MPs had suggested electricity suppliers should be prevented from recovering the costs of their RAB payment obligations from consumers who are on universal credit.
However, officials rejected this idea, saying such a measure could “disincentivise suppliers from engaging in commercially beneficial practices” such as payment plans and loyalty benefits to attract customers. They also argued other vulnerable consumers not claiming universal credit could also be affected by the move.
The Green party MP, Caroline Lucas, said: “When energy bills are skyrocketing right in the middle of a cost of living scandal, the last thing that people can afford is the ballooning cost of embryonic nuclear white elephants like Sizewell C.
“Not only are these projects extremely expensive to build in the first place, with Hinkley Point C now at £26bn without having generated a single watt of energy, the RAB business model passes that enormous upfront cost directly on to the consumer. While giant companies are spared with generous exemptions, the very worst-off in society will be footing the bill. Nuclear is too slow, too expensive and the wrong priority.”
The 3.2 gigawatt plant at Sizewell in Suffolk could be capable of generating electricity for 6m homes and is part of a project to approve a nuclear reactor each year by 2030.
Alison Downes, of the Stop Sizewell C campaign, said: “Taxes of any kind hit the poorest hardest and this nuclear tax is no exception. Multimillion-pound businesses will be let off the hook if they use a lot of energy but a family on universal credit struggling to afford its heating bills will have to cough up to pay for an unwanted nuclear power station.”
The Department for Business, Energy and Industrial Strategy (BEIS) said the government considered it very important to support low-income households but believed that “support for vulnerable groups would be best tackled holistically” by looking at the factors driving up energy bills.
The Guardian
‘It’s hot’: UK interest in solar power heats up as energy bills soar
“It’s hot,” says Steve Springett, a director of the renewable energy brand Egg, cheerily assessing the solar market. “There’s two key factors: people are understanding the environmental benefits of it better, and energy is really, really expensive at the moment.”
Consumer interest has increased in recent months as Britons hunt for ways to cut huge energy bills. A reduction in VAT on energy efficient systems from 5% to nothing this spring has added to the appeal of solar power.
The number of eBay searches for solar panels and solar power batteries increased by 54% and 134% respectively in June compared with same period last year. Consumers are also increasingly hunting for smart meters as they try to keep a handle on their energy use.
Murray Lambell, the general manager of eBay UK, says: “As the cost of living crisis hits, shoppers are seeking out savvy investments to keep energy costs low wherever they can. Many are choosing green energy options as a solution that’s good for their wallet and the planet, and we’ve seen a significant surge in demand for products like solar panels and batteries as a result.”
The boom is the latest in an industry so known for its unpredictable fortunes that it has been called the “solar coaster”. The name emerged from peaks and troughs created by the government’s “feed-in tariffs”, through which householders received payments for the electricity generated by eligible systems to incentivise their uptake.
A rush of installations took place on the eve of each deadline before payments would become less generous, followed by a fallow period. The closure of the scheme to new applicants in March 2019 drained some of the buoyancy from the market. Industry watchers say the market had become more stable since the scheme ended – until this year.
Data from the consumer credit reporting company Experian shows that about 1.9 million households intend to install solar panels or other renewable capabilities this year.
Springett says the huge increase in energy bills could reduce the time it takes to recoup the cost of an installed system, coming down from “double-digit years” to more like seven, depending on size and location of the property. Warranties usually last for 25 years and the panels – also known as photovoltaic cells – can last for up to 40 years. Costs typically vary between £5,000 and £15,000 for a family home, and applications to connect to the grid can take about three months.
“There’s a definite crossover between people who are getting solar panels, and electric cars and heat pumps. They want the whole package,” Springett says.
The clamour for panels is now so great that one senior industry executive says his company ran out of labour and materials to take new orders. “I tried to pass on inquiries to competitors to help out the customers only to find out they didn’t have the capacity to help them either. A lot of the installers went back to their professions, like electricians, when the feed-in scheme ended, and it’s hard to get them back,” he says.
The solar panel industry is noticeably fragmented in the UK, with few nationwide players. Ikea sold solar panels and batteries in the UK for two years before stopping in 2019, although it still sells them in Europe. Britain’s Solarcentury, which was founded by the oil geologist Jeremy Leggett, was bought by the Norwegian renewables specialist Statkraft in late 2020.
The Guardian
Feargal Sharkey warns London is ‘perilously close’ to running out of drinking water
Feargal Sharkey describes his dogged group of fishermen and clean river campaigners as “a bunch of bloody-minded, arrogant, cantankerous, ugly, middle-aged old men, far too used to getting their own way in life”.
The former singer and music industry executive may well be all of those things, but he has also become one of Britain’s most effective pollution campaigners, taking on the Environment Agency and water industry and pushing Britain’s rivers to the top of the news agenda.
Once a Top of the Pops regular who set hearts aflutter with Teenage Kicks in 1978, his current domain is Amwell Magna, the oldest fly-fishing club in England, where he is the chairman.
And a beautiful stretch of water it is. The Hertfordshire club has two and a half miles of wildlife-rich river, “the last bit of the Lea that actually looks like a river”, Sharkey says, before it becomes a grim, London-bound drainage canal.
Fishing is a kind of meditation, the only thing that helps his racing mind relax. Discovered in a Derry childhood and rediscovered when working as a record company executive 30 years ago, it “allows me to push everything else into the back of my mind”.
“The question becomes – how far are you prepared to go to protect and preserve it, and make sure it’s still here another 8,000 years from now,” he says.
This question has turned a lifelong love for fishing into a fervent campaign, beginning in the 1990s, when Sharkey and his fellow club members sought to work out why their beloved River Lea was disappearing entirely.
It took 20 years of fruitless investigation and campaigning for the problem to be found and solved – too much water was being diverted down a flood relief channel – and the river is an “awful lot better” than it was five or six years ago, he says.
The experience opened up a world of mismanagement, underinvestment and the failure of regulation. Not one of Britain’s rivers is in good health.
The next big issue, he says, is water shortages. London faces becoming one of the world’s most water-stressed cities, with a growing population and over-abstraction from chalk streams putting supplies in the South East under considerable pressure.
A 2017 report by the London Resilience Forum and Thames Water warned that drought was a “real and present threat to the capital”, while a 2018 study by Oxford University researchers concluded that the city faces “frequent and severe” water shortages, and should fix leaks and more efficiently recycle water in order to lessen the potential impact.
In a 2020 report, the National Audit Office warned that “if more concerted action is not taken now, parts of the south and south east of England will run out of water within the next 20 years”, while the Committee on Climate Change identified water shortages as one of the five “priority risks” facing the UK.
“That’s the thing that’s going to tip the scales. That’s the proper big one. Because when people start turning their taps on and there’s no water coming out of it, now you’ve really let the cat out of the bag.
“There’s no more kicking the can down the road. And it’s nothing to do with the environment. 25 million people in London and the southeast are now getting perilously close to running out of drinking water.”
His background in regulation (he was a member of the Radio Authority between 1998 and 2003) means he has a plan.
Water should be regulated like broadband or energy, with the infrastructure centrally controlled and expanded, but local suppliers opened up to direct competition, he says, rather than the regional monopolies that currently exist.
“Then you’ve got a choice as a consumer – you can deal with that multinational greedy bastard over there, who’s going to take every penny out of the environment they can get away with, or this other company that’s going to give them a bit of competition, provide a different service,” he says.
He is scathing on environmental charities, which he says should stop engaging with the Government.
“Whatever you’ve been doing for the last 30 years hasn’t helped. It has failed. It’s a pretty shameful end of the year report card for the environment lobby.”
The public are “f****** outraged”, he says. “They are really angry and really frustrated, and in the world of politics, that’s two really dangerous things. That stuff loses you elections.”
His own willingness to speak plainly to those in power stems from his own anger – and an honest understanding of the power he holds.
It has got him into meetings with water company executives, where his full-throated unwillingness to swallow their business plans leads to “being greeted with groups of people just staring very hard at their notepads, desperately trying not to make eye contact.”
Telegraph
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