Weekend press: Water bosses could see bonuses stopped over sewage spills

In our latest round-up of the weekend’s national media coverage, there are proposals for water bosses to lose their bonuses if the firm they run causes environmental damage, there are claims from government that Labour has an “£8 billion black hole” in its green plans and a major international energy security summit due to be hosted by the UK has been delayed by a year.

Water company bosses could see bonuses stopped over sewage spills

Executives at water companies could lose their bonuses in future if the firm they run causes environmental damage, like letting illegal sewage spills pollute a beach or river.

Environment Secretary Stephen Barclay said it was time water company bosses “took responsibility”.

Campaigners and opposition parties said they had been calling for restrictions on water boss bonuses for some time.

Regulator Ofwat will run a consultation on the proposal later this year.

This will determine whether the plan will go ahead and what types of incidents would cost someone their bonus.

Mr Barclay said the sanction should apply to any company that had committed “serious criminal breaches”.

“Tougher action” was needed to address water companies’ “poor performance”, he said.

“No-one should profit from illegal behaviour,” he added.

“In cases where companies have committed criminal breaches, there is no justification whatsoever for paying out bonuses. It needs to stop now.”

If the plan does go ahead, it would affect bonuses for the financial year April 2024/25 and would apply to water companies in England and Wales.

From Monday the regulator, Ofwat, has a range of other new tools at its disposal, designed to hold companies to account.

They include the ability to fine firms up to 10% of their turnover for providing poor customer service.

Public concern about the health of the UK’s rivers, lakes and beaches has been growing over recent years, especially around the impact of raw sewage discharges.

Anger has focused on the private companies managing the water supply and waste water, especially after an announcement last year that suppliers planned to put water bills up by around £156 a year by 2030 to help modernise the UK’s aging water infrastructure.

Climate change and population growth are putting pressure on the UK’s water system, much of which was built many decades ago.

Last year, senior executives from five of the 11 water companies that deal with sewage took bonuses. But at the other six, they opted to forgo them, after pressure from campaigners.

The Department for Environment, Food and Rural Affairs (DEFRA) said incidents that could cost executives their bonuses could include polluting a bathing site or conservation area, or a company being found guilty of serious management failings. The rules would apply to executives and board members.

Labour’s shadow environment secretary Steve Reed said his party had been calling for regulator Ofwat to be given the power to block bonuses since last year.

“Once again Labour leads, the Conservatives follow,” he said.

The Liberal Democrats said they had been calling for the ban for even longer.

The party’s environment spokesman Tim Farron said Mr Barclay’s proposals did not go far enough, and should include banning bonuses “regardless of criminal conviction”.

Ofwat has previously said it is looking for “a step change” in performance across the sector. Last year, Ofwat ordered firms to pay back millions of pounds to households after they failed to meet key targets.

BBC

Labour has £8bn black hole in its green plans, Jeremy Hunt claims

Jeremy Hunt has accused Labour of ­having an £8 billion black hole in its scaled-back green investment plans.

The chancellor made the claim as the Treasury published official opposition policy costing on Labour’s proposed windfall tax.

The document, which was produced by civil servants and is based on assumptions by Tory special advisers, claims the amount raised by the policy would be a mere £2.8 billion, far short of the £10.8 billion estimated by Labour.

As part of last week’s announcement, which scrapped the plan to spend £28 billion a year on green initiatives, the Labour leader, Sir Keir Starmer, promised a “proper” windfall tax on oil and gas companies. The plans include the ­extension of the tax until 2029, with the energy profits levy rising from 75 per cent to 78 per cent.

Hunt said: “Try as they might, Labour can’t get their sums to add up. These official costings show that Labour would raise just a quarter of the money they claim. Once again Labour simply don’t have a plan and that can only mean one thing — higher taxes on hard-working families.”

Labour immediately hit back at the chancellor, saying the ­Treasury’s analysis was flawed.

The party also pointed to a note on the Treasury document stating the costings were completed in January and that “since then further announcements have been made by the Labour Party, which would impact the costs of this policy”.

A senior Labour Party insider said: “Given the months they have had to work on this, the Tories’ document is embarrassingly bad. They either can’t count, or read, or both, but they certainly can’t do attack.”

Despite no date being set for the ­general election, the campaign is already under way as the Tories and Labour make the economy their key focus.

It is the second time in a week that Labour has dismissed Treasury analysis of its proposals as “bogus”.

Last week the government published a document that claimed Labour’s plans to improve energy efficiency across millions of homes would cost taxpayers £12 billion to £15 billion a year.

Hunt later appeared to acknowledge the cost of the Labour policy may not be as high as estimated by officials, telling ITV News that “even if it’s not double the £6 billion, it is still a very big chunk of a £28 billion spending spree”.

Laura Trott, chief secretary to the Treasury, also came under attack last week after she appeared to falter over her answer about the level of government debt when questioned on BBC Radio 4’s PM.

Trott suggested debt was falling as a percentage of gross domestic product (GDP) and said she had “different figures” when she was presented with the latest official projections from the Office for Budget Responsibility, which suggest an increase in debt over the next five years.

A Labour spokesman said: “Once again the Conservatives have costed somebody’s policy, but it is not Labour’s. This is yet another nonsense costing that fundamentally misunderstands the details of our policy.”

The Times

South East Water owners provide £150mn loan to ease financing pressures

The owners of South East Water, under investigation for severe supply failures, have provided a £150mn loan to a unit in the utility group as it struggles with higher financing costs on its debt.

The regional monopoly, which provides water for 2.3mn customers across Kent, Sussex, Surrey and Berkshire, is already on regulator Ofwat’s watch-list for financially at-risk companies.

In accounts filed in January, SE Water’s parent company, HDF Holdings, said its shareholders lent its Luxembourg-based financial subsidiary £150mn to replace third-party debt that was due to be repaid in December. The parent company’s owners include NatWest’s pension fund, a Canadian pension fund and an Australian infrastructure investor.

The loan decision underscores the stretched finances of several of the water companies in England and Wales, which are struggling with higher interest rates on their debt at a time when they are under pressure to invest in infrastructure. The 16 regulated water companies have racked up £64bn in borrowings after being privatised with no debt 34 years ago.

Financing costs at the SE Water group increased by £56.2mn to more than £130mn in the year to 31 March 2023 as the bonds it had issued rose in line with inflation, HDF’s accounts showed.

HDF warned that a future “severe but plausible” downside scenario “where it is hit by higher energy, chemical and operational costs” could provoke a “trigger event” in the South East Water group. In this situation, the refinancing enabled the interest on the shareholder loans to be added to the capital on the group’s balance sheet, the accounts said.

Adam Leaver, professor of accounting at Sheffield University, said the “holding company is sinking in debt”.

“This switch to shareholder loans is unlikely to resolve the basic leverage problem and suggests that problems are storing up for the future.”

South East Water Ltd, the only part of the group regulated by Ofwat, posted a £74mn pre-tax loss compared with a loss of £37.2mn the previous year. Despite this, it paid a £9mn dividend for the year ended March 2023 and has asked Ofwat to approve a 20 per cent increase in customer bills between next year and 2030, even before inflation.

SE Water said: “In common with many utility companies, South East Water’s cost of financing increased year to year predominately due to the inflationary environment. The loss before tax was due to the increase in finance costs and operating costs in the year.”

Last June, the company failed to deliver water to thousands of customers for more than a week, prompting an investigation by Ofwat.

Consequences could include fines or being brought under the government’s special administration scheme for restructuring or sale, said Ofwat. However, industry sources believe that to be unlikely.

SE Water declined to clarify the interest to be paid on the new shareholder loan. In a statement, Andrew Farmer, chief financial officer, said: “Refinancing loans that are reaching maturity is an activity in the ordinary course of business and in this instance the decision was taken to refinance the loan through shareholder loans rather than through external debt.”

SE Water has £1.23bn of borrowings and the second-highest regulatory gearing — the debt a company has as a proportion of its regulatory capital base — at 74 per cent, below Thames Water’s 80 per cent, according to Ofwat. The amount of equity in the company shrunk 60 per cent from £162,958 at 31 March 2022 to £64,774 a year later.

Financial Times

UK in talks with Hitachi over buying Welsh nuclear site

 The British government is seeking to take control of a key site in Wales earmarked for a nuclear power plant as part of wider plans to revamp nuclear technology for the UK.

State-owned Great British Nuclear is in early-stage discussions with Hitachi, owner of the land in Wylfa in Anglesey, an island off north Wales, to buy the site with a view to finding a new private sector partner to develop a station there.

The site has been in limbo since Hitachi abandoned plans to build a new reactor there in January 2019 after failing to strike a financial agreement with the British government. The Japanese industrial group eventually wrote off £2.1bn on the project. It also stopped work at a second site in Oldbury, South Gloucestershire.

Ministers are now determined to revive plans to use the Wylfa site for new nuclear power to help replace Britain’s current ageing fleet of nuclear reactors.

About 14 per cent of the UK’s power was supplied by nuclear plants in 2022. All but one of the fleet is set to close by the end of the decade, however, just as demand for low-carbon electricity is set to rise as part of the shift away from fossil fuels. The government wants the UK to have 24GW of nuclear capacity by 2050, compared with almost 6GW today.

Despite grandiose talk of a new generation of nuclear reactors, only one project is under construction — Hinkley Point C — and it is running billions of pounds over budget and several years late. A second proposed project at Sizewell in Suffolk has not yet reached its final investment stage.

One minister confirmed that tentative negotiations with Hitachi had already begun although they acknowledged the deal might not be finalised until after the election later this year.

The land is thought to be worth about £200mn, but there are expectations that Hitachi could settle for a lower price given the site is fallow.

Another figure close to the energy department said: “There are sensible conversations happening and Hitachi has no reason to hold out; they ought to take a cheaper price because the land currently has no value whatsoever.”

The site is one of eight areas in England and Wales that were earmarked for new nuclear power by the then-coalition government in 2010. It is next to the site of two former Magnox reactors that closed in 2012 and 2015, the last Magnox reactors in Britain.

Great British Nuclear was set up by the government in July last year to try to push forward new nuclear projects. Taking over the Wylfa land would pave the way for the government striking a deal with a developer to build a new plant there.

A consortium led by the US nuclear company Westinghouse and construction group Bechtel has proposed building a new plant there using Westinghouse’s AP1000 reactor technology. It is thought the site could also host small modular reactors.

The Department for Energy Security and Net Zero said the government had ended the “stop-start” approach to nuclear and “launched a road map setting out the biggest expansion of the sector in 70 years”.

Financial Times

Government delays ‘essential’ energy summit by a year despite 1.5°C warning

A major international energy security summit due to be hosted by the UK – designed to protect consumers from spikes in bills – has been delayed by a year, i can reveal.

The first-ever London Energy Security Conference was announced by then energy secretary Grant Shapps last summer, with the date set for spring this year.

After a period that saw energy prices soar due to instability caused by the Ukraine war and other events, the meeting has been touted as a way to “rewire the global energy system”. It was set to coincide with the second anniversary of Russia’s invasion or Ukraine.

However, under his successor Claire Coutinho, the gathering has been pushed back to 2025, the Government has quietly admitted. The Department for Energy Security and Net Zero claimed the delay was because of the number of elections taking place worldwide in 2024.

This decision will also fuel speculation that Rishi Sunak is keeping open the option of a May general election, despite him previously insisting it would take place in the second half of the year.

There is growing concern among environmental groups that both Conservatives and Labour are retreating from the net-zero agenda as the election draws near – despite the EU’s climate centre revealing that global warming exceeded 1.5°C above pre-industrial levels for the first time throughout 2023.

Sir Keir Starmer and Rachel Reeves have been widely criticised for axing their £28bn a year green investment pledge, while the Prime Minister has given the go-ahead for more oil and gas drilling in the North Sea.

In a written answer to Labour MP Olivia Blake, energy minister Andrew Bowie said: “Government now intends to hold the Energy Security Conference in 2025.

“The Secretary of State will discuss energy security with her international counterparts at events including the International Energy Agency meeting in Paris, the G7 in Turin, and bilateral meetings.”

Ms Blake, a former shadow climate change minister and a member of the Commons Public Accounts Committee, told i: “This Government has no future vision for the energy sector.

“Whilst global temperature rises exceeded 1.5°C last year, millions of people were left in fuel poverty and hundreds of thousands of jobs are being lost due to the lack of support for a just transition.

“By doubling down on new oil and gas, delaying the development of renewable energy and denying the science of climate change, they are making people colder and poorer.

“Neither Rishi Sunak nor his Government have any credibility to host a summit attempting to fix our broken global energy system – so no wonder it has been cancelled.

“Just months after COP28 [climate summit] agreed to ‘transition away from fossil fuels’, the Government has ripped up that pledge through the disastrous Offshore Petroleum Licensing Bill. Meanwhile, other countries are leapfrogging ahead.”

When he announced the summit last year, Mr Shapps – who was subsequently appointed Defence Secretary – said: “We can’t have global security without net zero. There’s no global security if millions of people are having to uproot because of weather patterns.”

A spokesperson for the Department for Energy Security said: “The Secretary of State will be discussing energy security with her international counterparts at events this year including the International Energy Agency meeting in Paris, the G7 in Turin, and bilateral visits.

“Given the number of elections taking place across the world this year, it is right to reschedule the energy security conference for 2025 so we can convene the right people to secure the best possible outcomes.”

i

How the UK’s electricity networks are shaping up for net zero

Prime Minister Rishi Sunak managed last year to get the electricity grid around his North Yorkshire home reinforced to help heat his private outdoor swimming pool.

While the 43-year-old picked up the tab himself, the task gave him an indication of one of the biggest projects facing the UK: upgrading the nation’s electricity system in the transition to net zero.

The government estimates £170bn-£210bn must be invested by 2050 on expanding and reinforcing the onshore cables and pylons that carry electricity to people’s homes and businesses from the country’s power stations.

The upgrades are needed so the networks can cope with the planned switch from fossil fuels to clean electricity, which will see households using battery cars and heat pumps reliant on electricity generated by wind and solar farms.

The UK government’s Climate Change Committee forecasts electricity demand could double by 2050, the target date for net zero carbon emissions.

But the large investments required, more than the £150bn the Energy Networks Association estimates has been spent since privatisation of the system in 1990, underline the challenge for the companies that own and run those networks.

The FTSE 100 companies National Grid and SSE, and Scottish Power, controlled by Iberdrola, own the main transmission networks and some of the regional distribution networks they feed into, which take electricity on to households.

The other regional distribution networks are UK Power Networks, part owned by billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings; Northern Powergrid, owned by Warren Buffett’s Berkshire Hathaway Energy; and Electricity North West, owned by a consortium led by Kansai Electric Power.

Regulators face the balancing act of trying to keep investors happy for the financing necessary to upgrade and maintain them while at the same time ensuring energy bills are affordable.

“The challenge is striking a balance between incentivising investment with rates of return that reflect company risk and performance, while ensuring that consumers do not pay more than is necessary to make future networks fit for purpose,” said Julia Prescot, deputy chair of the National Infrastructure Commission, which has been asked by the government to prepare a report on making the regional networks ready for net zero.

The Department for Energy Security and Net Zero said it was “driving forward the biggest reforms to our electricity grid since the 1950s” and had “announced measures to transform our grid network — bringing forward £90bn of investment over the next 10 years”.

The balance between bills and investment has already proved a problem for energy regulator Ofgem, which was criticised in 2020 by the National Audit Office, the UK spending watchdog, for allowing owners to make too high returns.

Think-tank Common Wealth said the distribution networks paid out £3.6bn to their owners between 2017 and 2021. UK Power Networks, with about 8mn consumers in London and south-east England, has paid out £434mn over the past two years for a total of £2.4bn in dividends since 2010.

North-east network Northern Powergrid, which serves an estimated 4mn homes and businesses, paid Buffett’s Berkshire Hathaway Energy £200mn in dividends in 2023 for a total of £351.5mn since 2004.

The sector’s appeal to investors has been underlined by merger and acquisition activity over the past few years.

National Grid paid £7.8bn in 2021 to buy Western Power Distribution, a regional group, from US company PPL.

The deal was followed in 2022 by the Ontario Teachers’ Pension Plan paying £1.5bn for a 25 per cent stake in the transmission lines owned by SSE in Scotland.

Both price tags were well above the companies’ regulated asset value.

Yet, despite return concerns, Ofgem is mindful that money is needed to finance network upgrades and pay for repairs and maintenance as the economy moves to clean power.

This means making sure they are attractive to investors for equity fundraising.

As a result, Ofgem is considering assessing companies’ “investability” in the next set of price controls for the transmission networks — National Grid in England and Wales and Scottish Power and SSE in Scotland — to determine acceptable levels of returns to ensure bills do not soar.

The plans for the “investability” metric follows lobbying from the sector, which has warned about “unprecedented demand for new equity financing” in the shift to net zero, according to Ofgem consultation papers.

The regulator added that its price controls are “designed to ensure that networks have access to the funding they need to deliver energy at least cost to consumers and meet net zero targets”.

High levels of debt are also a concern for some, with the potential for credit rating downgrades that could affect a company’s ability to raise money for investment.

Ofgem is looking at whether any further financial resilience measures are needed for the regional distribution companies, such as strengthening reporting requirements on debt structures.

Lawrence Slade, chief executive of the Energy Networks Association that represents the network owners, stressed the importance of attracting investment in the run-up to net zero.

Policy and regulation “need[s] to be bold in order to support the government’s ambitious goals while providing the stability and clarity required to efficiently secure the level of investment needed”, he said.

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.