Utility Week

UTILITY WEEK | 27TH SEPTEMBER - 3RD OCTOBER 2019 | 19 Finance & Investment Ovo's past losses will surely come into play to reduce future tax bills. Despite this sale and the loss of much of its customer-focusing element, SSE will remain a major force both in northern Scot- land and in the south of England: it acquired the Maidenhead-based Southern Electric more than 20 years ago. A-er all, SSE still owns a portfolio of generation assets amounting to 10.5GW of capacity, 3.8GW of which produces renew- able energy, along with various valuable energy networks. It has also been confirmed that the Euro- pean Union has approved the planned Eon acquisition of Innogy, in which its Ger- man rival, RWE, has been the dominant shareholder. Innogy's origins date back to the days of National Power, hewn out of the UK's nation- alised Central Electricity Generating Board (CEGB), and floated in 1991. Following EU approval, which requires some minor disposals, notably in the Czech Republic and Hungary, Eon will begin the complex integration process: its own renew- able generation assets and those of Innogy will be transferred to RWE. These transactions will have a marked impact upon the operations of what is now – following RWE's effective exit from Innogy (it is set to maintain a sub 10 per cent minority stake) – the big five. Oligopoly dominance eroded Unquestionably, the dominance of this oli- gopoly has been eroded, not just in terms of the industry's structure, but also because of specific challenges that each of its members currently face. In July, Centrica hit the headlines for all the wrong reasons. The 2019 interim results were disappointing – the introduction of price controls was a key negative factor. Furthermore, the dividend was cut by a whopping 58 per cent. Confirmation that chief executive Iain Conn will step down next year was therefore hardly a surprise. A-er all, over the past five years, Centri- ca's shares have plummeted and have given up three-quarters of their former value. For EDF, a litany of problems persists. In reality, EDF is a business – effectively owned by the French government – that faces a ra- of problems. The plunging share price, down by almost 90 per cent since 2007, tells its own sorry story. At the operational level, its vast French nuclear power fleet needs major refurbish- ment, while costs at both the Olkiluoto plant in Finland and at Flamanville – EDF's shop-window third-generation plant in France – are barely under control. The latest Flamanville cost estimate is now £10 billion. Within the UK, it is the £20 billion 3.26GW Hinkley Point C plant that is paramount. Its £92.50 per MWh inflation-proof con- tract for difference (CfD) strike price com- pares dreadfully with the approximately £40 per MWh equivalent for offshore wind projects on the Dogger Bank, 60 miles out to sea, that has just been announced. Of the original big six, there is no doubt that the Spain-based Iberdrola has seriously outperformed its struggling peers – despite disappointing returns from its ScottishPower subsidiary. Its market valuation – £53 billion com- pared with Centrica's meagre £4.3 billion – is driven by its laser-like focus on renewable generation, which started decades ago. Of the various renewable technologies, it was unequivocal in its view – which has been fully vindicated – that wind and, ulti- mately, solar would prevail and that others, including biomass, new hydro, tidal, wave, geothermal and fuel cells, would all struggle. Below the now big five level, only Shell looks likely to be a new entrant – if it chooses to do so. Its focus, though, is not on large gen- eration projects, something that was widely expected at privatisation to be undertaken by Shell and other major UK players, such as BP and three now disbanded businesses, Hanson, ICI and GEC: this investment did not materialise. Shell's focus, and that of BP, is on the rap- idly developing electric vehicle (EV) charging market, at the head of which both oil majors are seeking to position themselves. To date, Shell has bought both NewMotion and the US-based Greenlots, while BP has acquired Chargemaster, the UK's largest EV charging business. And, if either decided to bid for Centrica – and its valuable customer base – this would inevitably shake up the remaining big five even further. As for Ovo, it does not own material generation assets; to that extent, it is not an integrated energy business – but this does not mean that it cannot be a major player in the supply market. Credible business models While many start-up energy supply compa- nies have fallen by the wayside, there are some with credible business models that are beginning to gain traction. Both Utility Warehouse and Co-Op Energy are establishing themselves. There are similarities in that Utility Ware- house acquired much of its customer base from RWE Npower, while Co-Op Energy is similarly indebted to the Midcounties Co-operative: it has made subsequent acquisitions. And Octopus Energy, the offshoot of a successful asset management business, has just signed an innovative green energy deal with the Greater London Authority (GLA). So, as the 20-year UK energy supply oligopoly comes under renewed pressure, change in the sector is undoubtedly afoot – as the CMA's door-stopping, 1,400-plus page final report foresaw. Nigel Hawkins is the utilities analyst at Hardman and Co and a Utility Week correspondent SSE still owns a portfolio of generation assets amounting to 10.5GW of capacity Eon's renewable generation assets and those of Innogy will be transferred to RWE The end of the road is coming for Npower, which will eventually be taken over by Eon "The dominance of this oligopoly has been eroded, not just in terms of the industry's structure, but also because of specific challenges that each of its members currently face"

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