Utility Week

Utility Week 4th October 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Policy & Regulation Analysis Analysis Red Ed comes in from the cold Welcome Is Labour's promise to freeze energy prices back, CEGB good politics or mad economics? Perhaps both, says Ellen Bennett. Nigel Hawkins asks if an energy price freeze is the first step to re-nationalising the industry. I L t's January 2017. Energy prices have been frozen for 20 months following Labour's slim election victory in 2015. Eon, RWE and EDF have exited the UK market, and many small suppliers went bust when the wholesale price of gas spiralled in 2016, leaving only three major energy companies. Terrified that they will jack up prices when the freeze lifts, the government is seeking further price controls. Meanwhile, old coal-fired power stations are coming out of mothballs in the face of a capacity crunch, because investment in renewables has dried and new nuclear has become a pipe-dream. It's a Doomsday scenario, but experts agree that Labour leader Ed Miliband's proposed energy price freeze, announced at last week's Labour party conference, could have a host of unintended consequences, from curtailing investment in new generation to prompting companies to raise prices in the next 18 months in anticipation of the freeze. The fury from the energy industry that greeted Miliband's initiative arguably played into his hands. Keen to position himself as Red Ed and win over the left, Miliband must have been chuckling as the major energy companies warned of their "economic ruin" if he went ahead. Westminster watchers suggest that his plan was to look prime ministerial by forcing the companies into action. As Npower went live with an offer to freeze prices until 2017, under the banner "Why wait for Ed", it seemed he had succeeded. But the really significant announcements took place several hours before Miliband stepped on to the stage. Shadow energy secretary Caroline Flint set out what she called "the most radical, comprehensive reforms since energy privatisation". While prices are on ice, Labour is planning a wholesale reform of the energy market that it says will make it more transparent, more competitive and fairer for customers. Labour plans to introduce emergency legislation straight after an election victory in May 2015. This could be pushed through in a matter of days or weeks, and would give the government the power to cap prices by modifying suppliers' licences. This would 14 | 4th - 10th October 2013 | UTILITY WEEK last until January 2017, by which time Labour aims to have separated energy supply businesses from generation businesses, breaking up the vertically integrated big six. It would introduce firewalls between generation and supply so that companies couldn't sell energy to themselves at inflated prices and pass the cost on to consumers. It would also increase liquidity, making it easier for new entrants to the supply market to buy the power they need. Labour also plans to introduce an Energy Supply Board. Though details are scanty, it would be modelled on the Office of Budgetary Responsibility and be given the task of ensuring security of supply in the face of conflicting forecasts and estimates. Labour is adamant that the price freeze would be a temporary measure, designed specifically to put the market in a holding pattern while it sorted out competition issues. But this overlooks the effect the price freeze would have for its not insignificant 20-month duration, and the message it would send to investors and companies. In a note from Macquarie last Thursday, the leading infrastructure investor estimated losses for five of the big six ranging between 1 per cent of their share value for Iberdrola to 5 per cent for Centrica. It also predicted that supply disruptions could result. Most worryingly, it said the policy could be the "thin end of the wedge", with further freezes and regulation likely to follow. Economists and history agree. In a recent blog, professor Catherine Waddams of the Centre for Competition Policy at Norwich Business School, writes: "Just as markets are not perfect, neither is out-and-out price regulation, a return to which may lead to higher costs and ultimately prices. It will certainly risk lower security of supply and slower realisation of environmental objectives." With the Conservatives gathering in Manchester as Utility Week goes to press, the debate on energy prices will continue to make national headlines. One thing is for sure, the ideal of a privatised energy market envisaged in 1989 has never looked further away. abour's leader Ed Miliband has certainly set the proverbial cat amongst the utility sector's pigeons with his widely-reported Brighton conference speech. His radical proposal to impose a 20-month freeze on electricity and gas prices has been widely applauded by consumer groups and, depending on what poll you read, the general public. The energy companies affected are unanimous in opposition. Indeed, the day after Miliband's shock announcement, shares in Centrica and SSE fell by almost £2 billion as many investors – recognising Labour's lead in opinion polls – took fright. There are many implications of Miliband's proposals. First, whether utilities will hike prices prior to the next election in order to establish a higher charging base. Second, the prospects of fully implementing the £110 billion future energy investment programme, already slim, are reduced further. Third, some energy companies will fundamentally reassess their role in the UK energy market – RWE and Iberdrola may seriously consider whether to exit entirely. More generally, Miliband's approach represents a far more doctrinaire stance towards the utilities sector than that of previous Labour leaders. Planned price freezes can be readily extended beyond the proposed 20-month period and effectively become embedded price controls: the current £20 billion-plus energy tariff deficit in Spain is a salutary example. Price freezes will lead to lower margins, Consensus estimated utility losses: Centrica could see a c.£1.2bn value hit, 20p/ share 5% SSE c.£700mn, 60p/share value 4% RWE c.€580mn, €0.6/share value 3% Eon c.€650mn, €0.22/share value 2% Iberdrola c.€315mn, €0.05/share value1% Source: Macquarie Equity research

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