Utility Week

UTILITY WEEK | JANUARY 2022 | 7 The Month in Review Ofwat mulls protections against 'risky' financial structures Raising the minimum level of investment grade from ratings agencies, formalising dividend expectations, and updating outperformance mechanisms for future price reviews have been proposed by Ofwat in a consultation addressing financial resilience in the water sector. The regulator suggested a series of measures following its report Monitoring the Financial Resilience in which the regulator raised concerns that nine companies' gearing was above the 60% notional level set out in PR19 determinations. It also highlighted that credit ratings for Southern, SES and Yorkshire were at risk of falling to the minimum investment grade. The consultation set out options for strengthening current arrangements to protect billpayers from the consequences of weak resilience. Ofwat suggested these could include placing limits of gearing, which was discussed as an option by the Competition & Markets Authority in its redeterminations of four companies at PR19. Ofwat said this approach would be unlikely to capture the full range of possible risks and lacked flexibility to change with circumstances and investment programmes. It instead proposed raising the minimum standards of credit quality required to avoid companies holding ratings without sufficient headroom. There were a number of notable people moves in the utilities sector over the past month. They included: Shell Energy The head of Shell Energy's retail busi- ness, Ed Kamm, will step down in January for personal reasons. Kamm was appointed as chief executive of the business in December 2020 a'er two years as chief commercial officer. He held the same role at First Utility for 18 months prior to its acquisition by Shell and had previously been UK MD. Replacing Kamm as chief execu- tive will be Tony Keeling, formerly managing director of SSE Retail. Keeling also led SSE through its integration with Ovo Energy and oversaw the trace division of the Track and Trace service. At SSE, Keeling held leadership roles across technology, opera- tions, transformation and general management and worked at PwC prior to that. Anglian Water Anglian Water has created a dedicated quality and environment directorate and welcomed Robin Price back to the organisation from Water Resources East to head up the new division. Price, who has spent the past three years as man- aging director of the water manage- ment group, was previously head of water quality at Anglian. Ofgem The energy regulator has appointed the former commercial director of recently failed Colorado Energy as its interim deputy director for the price cap. During his 10 months at Colo- rado, Daniel Norton was respon- sible for energy pricing, product development, demand forecasting and trading. Norton has 20 years' experi- ence in the sector, spending nine of those at Centrica where he rose to become head of energy supply hedging and ultimately strategy director for UK consumers. ON THE MOVE Investment firm Elliot Advisors has written to the chair of SSE to put pressure on the company to separate its renewables and net- works businesses and list them separately. The company, which advises funds that together represent one of the top five investors in SSE, said the group's current structure forces the divisions to compete for capital and atten- tion and presents a confusing offer to potential investors. In a letter shared with the media, Elliot said separation would increase their combined share price by around 30% and their market capitalisation by £5 billion. The firm said the networks and renewables divisions are "intrinsically different", with the former being a "stable, fully- regulated business generat- ing predictable cash flows that finance capex investments and dividend" and the latter a "high- growth business with substan- tial upfront equity investment requirements to build scale with attractive project-level returns." "Despite its significant expo- sure to high-quality renewable assets… SSE currently trades at a steep discount to its renewables peers and only in line with pure- play networks peers that have no exposure to renewables assets," it noted. The letter said SSE's announcement in November of the sale of a 25% stake in its network represents a "missed opportunity" to unlock the group's unrealised value. Responding to the letter, SSE chief executive Alistair Phillips- Davies said: "Separation risks valuable growth options across the clean energy value chain, would jeopardise our ability to finance and deliver the major infrastructure the UK needs to create jobs and achieve net zero, and would lose shared skills that benefit the group. "Separation does not support the financing of our core growth businesses and would rule out adjacent growth options, as well as reducing the resilience of the business model. It is not the right outcome to maximise value for shareholders or our other stakeholders." SSE 'should spin-off its renewables business to unlock shareholder value' charge so that it would only come into effect if wholesale prices fell significantly below the level assumed in the summer 2022 price cap – somewhere between 30% and 50% based on its current modelling and market outlook. Government pauses plans for energy autoswitching On the same day that Ofgem updated on its proposals for the retail market, the govern- ment announced it would pause development on its recent con- sultation on autoswitching as part of a "refresh" of its energy retail strategy. Published in the summer of 2021, the strategy had a heavy focus on switching disengaged customers automatically when they reached the end of their default tariff, as well as prompt- ing switching more generally. Energy secretary Kwasi Kwarteng said that while the vision for the government's strategy remains the right one, it also needs to take into account the lessons from recent months to ensure the market is "resil- ient, sustainable, and continues to protect consumers as we move to a net zero energy system". "The government therefore intends to review these lessons as part of a wider refresh of the current energy retail market strategy, with the aim of publish- ing an updated strategy as soon as possible, once the market has stabilised," he said. He further revealed that the government is now seek- ing views on how future policy could best achieve the vision set out in the strategy, and how the lessons from recent market developments should inform this. In particular, the govern- ment is interested in how the market can achieve the best outcomes for consumers, how energy companies can help drive private investment needed to achieve net zero and how the market, underpinning regulatory framework and the price cap may need to evolve. Adam John, senior reporter

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