In our latest round-up of news from the national press, the boss of SSE has warned the company will have to review its investments in renewables because of the government’s new 45% windfall tax on electricity generators. Elsewhere, Ofgem is under fire from Citizens Advice over the way certain costs are allocated to consumers.
Energy company to review green projects after levy
One of the UK’s biggest energy firms has warned that it will have to review its investments in renewables because of the government’s new 45% windfall tax on electricity generators.
The boss of SSE told the BBC it “may have to give up” on some green energy plans when the levy comes into effect.
The levy, unveiled in the Autumn Statement, hopes to raise £14bn.
Chancellor Jeremy Hunt said there were “extraordinary returns” to be made from low-carbon generators.
But Alistair Phillips-Davies, the CEO of SSE, said while the company believes in “paying their fair share” in taxes, the decision “is going to take money away from us”.
He told the BBC’s Today programme: “We still want to spend, we still want to invest but this windfall tax is going to hit us.
“It’s going to take money away from us, and therefore we won’t have as much to invest.”
Asked whether the company will have to review some of its key investments, the CEO said “there is no doubt”.
“To say that imposing a 45% windfall tax on some areas of our business will not impact investment plans is nonsense,” he added.
Concern has already been raised from the sector this week.
Offshore Energies UK, a company that provides cleaner fuel and power, claimed the tax rise could also drive up imports and leave consumers more exposed to global shortages.
OEUK chief executive Deirdre Michie said the tax changes would “undermine” an industry which had generated jobs for 200,000 people.
She said: “We remain proud to pay our taxes, but this latest increase means UK offshore operators will be paying a total rate of 75%.
“It’s also worrying that we are increasing taxes on low-carbon electricity generation like offshore wind.”
Trade body Scottish Renewables also expressed concern, and said that the profits companies are said to make are not as clear-cut as they appear.
Chief executive Claire Mack said: “Many renewable energy generators on older contracts have sold their power far in advance, so are not benefiting from excess profits from wholesale price rises caused by the cost of gas.”
BBC News
UK energy regulator accused of shifting costs to consumers
Energy retailers are making higher profit margins because the industry’s regulator has shifted some of the risks and costs of running their business to household bills, UK consumer group Citizens Advice has said.
Ofgem, the energy regulator, introduced a series of measures this August that boosted profit margins allowed under the government’s energy price cap — which was instituted in 2019 and put a limit on how much power companies can charge per unit of energy.
Allowed profit margins under the price cap have almost tripled from around £24 per customer on an average dual fuel bill in October last year to £63 during the same month this year, according to Citizens Advice.
“Supplier profit margins are higher than they should be,” said Andy Manning from Citizens Advice. “We are concerned that consumers already faced with a cost of living crisis are being forced to prop up energy suppliers.”
The measures contributed to the 80 per cent increase in the price cap to £3,549 a year for an average household from October 1. Households have subsequently been protected by a government bailout — the energy price guarantee — which will limit costs for the typical home to £2,500 until April next year and £3,000 after that.
However, the guarantee also protects suppliers because they receive a guaranteed payment above that level, which is included in the wholesale price of power, said Citizens Advice.
Ofgem made the changes to stop more energy companies from failing after 29 of them collapsed last year. The cost of transferring the customers of failed suppliers to rivals is being spread across all household energy bills. The National Audit Office in June said that every household is already paying an additional £94 a year on their energy bill to cover the costs of collapsed energy companies.
That is expected to rise further after the UK Office for Budget Responsibility said last week that the projected cost to taxpayers for failed retail energy supplier Bulb has soared to £6.5bn, potentially adding more than £200 to household bills from next year.
Citizens Advice said the protections introduced for suppliers in August were already adding to customer costs and that the regulator had either “transferred risk from suppliers to customers or provided separate remuneration” to companies, which is paid for by households.
Analysts at Investec have forecast that the energy price cap will rise to £4,226 from January — though the government price guarantee will still be in place.
Martin Young, analyst at Investec, said that “supplying energy had turned out to be a riskier business than expected and the industry needs well-capitalised suppliers who can bring forward innovation to assist the drive to net zero”.
Ofgem has flagged concerns that allowed profit margins under the price cap are too large and launched a stakeholder consultation on the question in August. “The current approach could provide unduly high returns to energy suppliers,” the regulator said.
“We are currently considering all representations. We intend to publish a statutory consultation soon.”
Financial Times
Why are there still hosepipe bans when it’s been raining so much?
Heavy rain throughout November may have left some wondering why hosepipe bans are still in place in parts of the country.
Four water companies – South East, South West, Thames, and Yorkshire – still have “temporary use bans” restricting the amount families and businesses can use.
Southern and Welsh Water recently lifted restrictions they imposed in the summer after supplies improved, but officials in Wales warned that reservoir levels in the southeast of the country are still dropping.
What are the water companies saying?
South East Water said its current hosepipe ban will remain in place “for the foreseeable future”.
This is because water levels at reservoirs and aquifers are “much lower than normal after the dry, hot summer”, its head of water resources Lee Dance said.
He added: “Although we are receiving some much-welcome rain in the South East, we will continue to monitor rainfall through the winter and evaluate whether changes can be made.”
South West Water only has bans in areas where water levels are “especially low”.
It said recent rainfall has helped river and reservoir levels “slowly start to recover” but supplies remain reduced throughout the region – especially in Cornwall.
Yorkshire Water strikes a more hopeful tone, saying: “Reservoir levels are moving in the right direction.
“We’re seeing some significant increases week on week as the rainfall, drought permits, additional leakage activity and support from our customers to save water, help them to top up.”
But it added that “rain doesn’t always fall evenly across the whole region” and that South Yorkshire in particular still has low level reservoir levels.
When it introduced its ban on 24 August, Thames Water cited low groundwater levels across the region and “significantly reduced” supplies at reservoir stores in London and Oxfordshire.
At the time, it had to withdraw 120 million litres from its North London Aquifer Recharge System underground.
A spokesperson said that “due to recent wet weather, our water resources have begun to replenish”.
But it cautioned that rivers and groundwater have needed “a lot of refilling” and it is “reviewing the situation on a weekly basis”.
Why isn’t the recent rain doing enough?
With temperatures exceeding 40C (104.5F) this summer, 2022 has been the driest year on record since 1976.
Water companies had to increase their water supply by 40% in some areas – the equivalent of hundreds of millions of litres.
After drawing on those reserves, 11 of 14 areas in England are still in drought – despite it raining most days in November.
According to the Met Office, by November, the UK would usually expect to have seen 88% of average rainfall for the whole year.
But the country as a whole is currently falling well short of that – at 76% or 879mm of rain.
And England and Wales have seen even less – at 70% (605.8mm) and 68% (1001.2mm) respectively.
Scotland and Northern Ireland are doing slightly better at 82% and 83%.
A Met Office spokesperson described current rainfall levels as “still well below average”.
They added that although it has “boosted totals slightly… it hasn’t been enough to bring them back to average for the whole year”.
Sky News
‘Rampant profiteering’: Unite asks Ofgem to cap power distributors’ profits
The companies responsible for bringing electricity to UK homes have been accused of “rampant profiteering” by a leading union that is calling for the energy regulator to cap their earnings.
Sharon Graham, general secretary of Unite, has written to Ofgem to ask it to clamp down on “excessive” profits generated by regional electricity distribution network operators (DNOs), which raked in £15.8bn in profits last year and have paid out £3.6bn in dividends between 2017 and 2021.
In the letter to Ofgem, which has been seen by the Guardian, Graham said the six operators have “been holding the public to ransom for too much and for too long” and called for a recent consultation on the amount they could charge energy suppliers, and ultimately consumers, to be reopened.
Graham wants Ofgem, which has been condemned for its handling of the energy crisis, to revise its policies to tighten the controls on DNOs. “It is time to set a clear cap on profits to help give consumers confidence that their energy bills are fair and not simply a vehicle for profiteering energy network owners,” she said.
Research by Common Wealth, a thinktank, shows that DNOs have higher profit margins than any other sector in the UK, and expects operators to register profit margins of more than 50% in 2022. The thinktank argues that consumers are paying for privatised monopolies to reward their investors.
The government has curbed profits on North Sea oil and gas producers and introduced a levy on “excess returns” made by electricity generators including windfarms and nuclear power plants.
However, the profits of DNOs – which carry the energy but do not sell it – have not been on the political agenda. Their earnings have not been inflated by high wholesale gas prices, but charges to consumers through network costs have been rising.
Ofgem sets price controls on the monopolies’ revenues for five-year periods to ensure that companies run efficient networks and are incentivised to invest in improving them.
The current network price controls period ends this April, with the next five-year period beginning after that. Ofgem is due to make its final determinations on the pricing on 30 November after a consultation with the industry, which began before the energy crisis.
In her letter to Ofgem’s chief executive, Jonathan Brearley, Graham asked for the regulator to reopen the consultation.
As part of her call for an earnings cap, she cited the profits of UK Power Networks (UKPN), which distributes power to 8.3m homes and businesses across London, the east and south-east of England. Common Wealth analysis shows the company has made £2.4bn in profits over the past four years.
The UK’s largest electricity distributor, which is owned by CK Hutchison, the Hong Kong-based holding company that also owns the port of Felixstowe, has paid out £1bn in dividends to shareholders over the same period. CK bought UKPN for £5.5bn in 2010 and a £15bn sale of the DNO to a consortium collapsed in the summer amid concerns over the price.
In the past four years, Northern Powergrid, which has 3.9 million customers in north-east England and Yorkshire, made £1bn in profit, and Electricity North West made £323m, handing out £212m to shareholders. Northern Powergrid did not pay a dividend during the period, but did in 2015 (£100m) and in 2017 (£50m).
A spokesperson for UKPN said its cost to the customer was £98 on average, “one of the lowest of any UK electricity distributor and falling as a percentage of the overall electricity bill by a proposed 15% in real terms over the period 2023-28”. The company has invested £6.4bn over 11 years in networks, it said.
Ofgem said: “We do not believe that it would be in consumers’ interests to delay the implementation of the price control.”
A spokesperson for Energy Networks Association, which represents energy network operators, claimed that Unite’s figures were “misleading” and that investment returns were an accurate reflection of profitability. “The network companies are allowed, by Ofgem, to earn around 5% on their investments and the figures being suggested do not reflect the costs associated with these essential investments,” he said.
The Guardian
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.