Utility Week

10 | 30TH NOVEMBER - 6TH DECEMBER 2018 | UTILITY WEEK Policy & Regulation Analysis F or virtually a generation, the big six have dominated UK energy markets. But, as the song goes, the times, they are a'changing. On a general level, many venerable com- panies have suffered of late from the impact of market disruption. And, while it's true that the advent of the electricity min- nows has taken mar- ket share away from the big six – the lat- ter now control just 80 per cent of the electricity supply market compared with virtually 100 per cent in 2010 – the challenges are more fundamental. This conclusion is based on analys- ing share price performances since 2006, when the energy sector was peaking. Subse- quently, investors have suffered real harm, especially if they were long-term holders in Eon and RWE. In 2007, Eon was riding high with a strong balance sheet. Thereaer, problems piled up as the company's net debt rose very sharply: RWE was in a similar position. Neither com- pany prospered during the credit crisis and the ensuing recession – as defensive utility stocks are supposed to do. Energy demand fell, along with profits. The German government's highly contro- versial – and unexpected – decision in 2011 to discontinue nuclear power generation by 2022 has caused both companies immense problems. In effect, they are now the owners of stranded assets – with high decommis- sioning costs to finance as well. The share prices of Eon and RWE has fallen by over 80 per cent from their peak, although there has been a modest rally of late. Aer considerable analysis, Eon addressed its deep-seated problems by going downstream. It foresaw better pros- pects in regulated energy markets – with their assured cash flows – and in exploit- ing its formidable customer base. As such, its generation interests have been heav- ily reduced, all the more so following the sale of its demerged Uniper business to Finland's Fortum. Despite a similar lineage to Eon – both companies operate out of Essen in the Ruhr – RWE has decided on a very different route. Having been founded as a genera- tor, it has resolved to remain that way. It has, though, rather belatedly recognised the attractions of renewable energy. As such, it owns a near 77 per cent stake in the demerged Innogy business. Furthermore, Innogy, the owner of Npower, has agreed a complex deal with Scotland's SSE to become a minority partner in a new energy supply business. Approval has been granted by the Competition and Markets Authority (CMA) but the deal has run into trouble recently on several counts. First, renegotiations are taking place to address the financial impact of the long- flagged energy price cap that is to be applied to the standard variable tariff (SVT). Second, Npower's ongoing financial returns are dire – Innogy has taken a €748 million impairment charge in respect of its wilting Npower operations. Third, RWE recently announced that it had agreed the sale of its near 77 per cent stake in Innogy to Eon; the latter already holds a sizeable share of the UK supply market. For SSE, these developments are highly unwelcome. Its share price has been weak of late as it seeks to curb its net debt and to avoid any dividend cut. Indeed, it has expressed real doubt that the combined finances of SSE/Npower are robust enough to enable the initial public offering slated for next year. The planned demerger of its energy supply business was designed both to improve SSE's finances and to focus its inter- est on the most profitable opportunities – regulated network returns in Scotland being high up the agenda. There must be some doubt whether the SSE/Npower demerger proceeds. In any event, its recent experiences will probably dissuade SSE from attempting further radical restructuring. Its UK big six counterpart, Centrica, remains "under the cosh". Its share price has fallen by about 60 per cent since 2013. Fur- thermore, it is under real political pressure to raise its game. The strategy of chief execu- tive Iain Conn seems to replicate that of Eon rather than that of RWE in that "downstream retail is good but upstream generation is not". Improved financial results have, though, proved elusive. The new price caps on retail energy sales are hardly likely to help, while Centrica's US operations have run into problems in recent months. The focus on retail custom- ers sounds good in theory but whether it translates into serious profitability is a moot point. A shake-up within Centrica is not widely expected but at the core of its strategy should be how – given its dominant share of the UK gas market – it can achieve far better returns. And, against that background, Cen- trica remains a bid target for an ambitious international energy company. For EDF, with net debt of €31.3 billion, its finances remain as stretched as ever despite a government-supported €4 billion fund-raising last year. For varying reasons the company is in effect a nationalised busi- ness – and is beholden to the French nuclear industry. Its building programme for the third-generation EPR reactor continues to face massive cost and time over-runs. The new EPR plant in Olkiluoto in Finland is now almost a decade behind schedule, UK energy: The winds of change Energy firms have long been chastised for 'profiteering', but the dire share price performance of most of the big European companies over the past decade tells a different story. Nigel Hawkins reports. Npower's ongoing financial returns are dire – Innogy has taken a €748 million impairment charge for Npower

• Cover