Utility Week

14 | MARCH 2022 | UTILITY WEEK Energy retail Analysis Liz Parminter and Amy Marshall, energy experts, PA Consulting Energy is generally considered a basic human right and access to it is essential for an adequate standard of living and to pro- mote health and wellbeing. In that context, the chancellor's intervention is appropriate and necessary, because without his pack- age of support, millions of British house- holds would be in fuel poverty. It does, however, provide only short- term protection for consumers by subsidis- ing and smoothing the impacts of the forces affecting the current energy market. It does nothing to protect them in the longer term. Given the price cap is currently reviewed every six months and that the wider global forces that have pushed up prices are sig- nificant and outside of our control – it's difficult to imagine that these issues will be resolved in time for the next review. Consumers will undoubtedly face fur- ther price shocks as the global supply and demand balance adjusts and the demand for gas as a transition fuel from coal to clean energy persists. That means the next price cap will bring more of the same and more sticking plasters will need to be applied. Our energy system can only be insulated from the worst of global macro-economic events if we become more self-reliant, and more efficient in our use of energy. Main- taining our longer-term security of supply has and always will be a political issue and one lesson from the current situation is that we need a faster path to home-grown renewable energy generation. This has been the focus of government policy for at least a decade and there has been laudable focus on decarbonising the energy system, but we now face an acute crisis where we need swi„ action to also protect our longer-term energy security, and provide affordable energy. That requires urgent intervention to secure and decarbonise energy supply. This means new approaches to how our elec- tricity is generated, the infrastructure we need to transport it to customers, and how wholesale markets are priced to recognise intermittency and reward flexibility pro- vided at a local level. Looking first at generation, there are instruments available – Contracts for Dif- ference (CfDs) and Power Purchase Agree- ment (PPAs) – that were designed to signal A new-look retail market takes shape Nigel Hawkins, Utility Week contributor and utilities analyst at Hardman & Co Entomologists should make a bee-line for the UK energy supply sector – its members have been falling like flies of late, battered by the surge in gas prices. It begs the question as to how the long- term UK supply market will evolve. A„er over 30 years of operation, the UK mobile telecoms sector may provide a clue. Currently, the leading quartet account for around two-thirds of the UK market. British Telecom's EE leads the field, at 22%, with the overseas-owned O2 on 19%. The UK's Vodafone has a 15% share while the Hong Kong-owned Three has 10%. In time, the domestic energy supply mar- ket might end up with a similar profile. Of the remaining former big six players, Centrica's position offers by far the most scope. These days, it is anything but long on gas: its cornerstone Morecambe Bay Hub is well past its production peak. And Centrica is currently engaged in selling Sprint Ener- gy's Norwegian assets sale for around £800 million. Centrica's shocking share price per- formance – down 80% since 2013 – high- lights its plight. Importantly, its net debt has plunged to just £93 million, giving it real scope to invest in recovering its heav- ily eroded share of the UK energy supply market. Through the Supplier of Last Resort (SoLR) mechanism, Centrica has recently hoovered up over 400,000 disenfranchised energy consumers via Neon Reef (30,000), Social Energy (5,500), Zebra Power (14,800), Bluegreen Energy (5,900) and People's Energy (350,000). More will certainly follow, as Centrica seeks to re-establish its former market status as King Gas. Of the other big six players, the two German suppliers, Eon and RWE, have undergone major structural change of late, including the absorption of Innogy into the former. However, the long-term energy invest- ment requirements in Germany, with the Green Party now in the coalition govern- ment and nuclear power plants being closed down, are such that the focus of both must surely be on Germany. EDF is facing immense challenges on many fronts: massive overruns on new-build nuclear; almost 20% of its nuclear fleet cur- rently off-line; and a much unwanted politi- cal intervention from its 84% government owner compelling EDF to sell more electric- ity at knockdown prices. Furthermore, with net debt of €41 billion, it is no surprise that its share price is now around 10% of its peak in 2007. Hinkley Point C aside, it seems clear that EDF's focus will be increasingly on France. Iberdrola, whose share rating has heavily out-performed its struggling rivals due to its expanding renewable energy capacity, will understandably give priority to that division, despite its other businesses in Scotland and via SP Manweb. From disruptors to consolidators From the collapsed pile of new energy sup- pliers, a few companies may well emerge as sector consolidators. Certainly, Ovo Energy has enough cus- tomers to do so – 4.5 million in total, 3.5 mil- lion of which were bought from SSE. But, despite revenues of around £4 billion a year, Ovo is still heavily loss-making. Ovo's co-founder and effective owner, with a 67% stake, is Stephen Fitzpatrick. Undoubtedly, he will have been buoyed by the 20% stake acquired by Mitsubishi in 2019, which placed an imputed £1 billion valuation on Ovo. Recent market develop- ments suggest that its current value lies well below that figure. The thriving Octopus Group is another obvious consolidator. In five years, it has signed up three million customers and its Kraken platform is highly regarded. The UK and Germany are its key European markets and it has some involvement in both Aus- tralia, via Origin Energy, and in Japan, via Tokyo Gas. Crucially, its financial backing, via Octo- Is the government right to intervene in the energy continued from previous page

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