UK energy policy

The full-scale competition review of the UK’s energy market which will be announced later this week is a challenge the industry should welcome. The inquiry will absorb a huge amount of time and effort over the next year but it offers the chance both for the industry to clear its name by removing the cloud of public suspicion over pricing policies and simultaneously for individual companies to examine their own strategic positioning in a market which is changing rapidly.

Of course, the competition review will add to uncertainty and will reinforce the reluctance to invest in new generating capacity, which is already evident, but the sense of doubt will exist in any case, and the review may help to produce some longer-term clarity. In the short term the government will have to find a new mechanism to ensure that supply is adequate to meet demand – and doing so with an expensive plan for emergency electricity supplies. But that is a separate issue from this fundamental analysis Read more

George Osborne in his Budget speech on Wednesday talked, correctly, about US industrial energy costs being half those of the UK. The situation has deteriorated rapidly over the past five years. His proposed response is worth quoting directly:

“We need to cut our energy costs. We’re going to do this by investing in new sources of energy: new nuclear power, renewables, and a shale gas revolution.”

This must be a speechwriter’s joke. A line written in where the content bears absolutely no relationship to reality. New nuclear at £92.50 a megawatt hour will double the current wholesale price of electricity. New offshore wind on the Department of Energy & Climate Change’s own figures, which many feel are too low, will cost more than £120/Mwhr. These are not secret figures. They are well known in the Treasury, as is the risk of generating capacity failing to meet demand. There was no mention of that little problem. Read more

Forget the evidence, feel the populism. That seems to be the motto of the UK secretary of state for energy, who has written to regulators suggesting that British Gas and perhaps other gas suppliers should be broken up because their profits are too high. There is nothing like picking on an enemy no one loves. With their refusal to be completely transparent on costs and pricing, the utilities have made themselves sitting ducks.

Never mind that there has been no competition inquiry (rejected by the Government despite support from EDF, who rightly argued that one was needed to clear the air). Never mind that the figures quoted by Mr Davey have been in the public domain for months, without triggering action by Ofgem. Never mind that Ofgem is a highly professional public body that knows what it is doing. And most of all, never mind the consequences. Read more

UK-based energy companies who have held investor relations meetings in the US in recent weeks have encountered a bleak response. The UK energy sector, they were told, is “uninvestable”. This is the market’s response to two months in which the certainties of the UK energy market have been undermined by politics. Given the scale of new investment required as old capacity is retired, this stark conclusion is very damaging and must be addressed by the Chancellor in his autumn statement on December 5. Read more

Any new graduate wanting to learn about how companies should handle tough public policy questions should study how the energy companies have responded to Ed Miliband’s proposal to freeze utility prices in his party conference speech three weeks ago. Their actions and comments have been a masterclass in how to make a difficult situation worse.

We have had a mixture of denial (“they’ll never get elected”, “he didn’t really mean it”, “the lawyers will stop him”), mindless abuse (“I don’t think people want to live under Stalinism”) and fear tactics which usually mention the prospect of the lights going out. No one in the industry has bothered to think about why Mr Miliband’s comments have proven so popularRead more