Utility Week

Utility Week 6th December

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

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Finance & Investment Investor view Nigel Robinson National grid share price "You cannot escape the revelation of the identical by taking refuge in the illusion of the multiple" (Umberto Eco, Foucault's Pendulum) 800p 700p 600p 500p 2006 2007 2008 2009 2010 tackling the sharp rises in energy bills, these doubts persist, especially in light of the pledge by Labour leader Ed Miliband to impose a 20-month freeze on energy prices were his party to win the next general election in 2015. Furthermore, there are now real doubts as to whether the Energy Bill will be enacted in its present form because its drafting preceded the recent political wrangling over energy policy. It remains the case, too, that crucial investment issues, such as capacity credit payments, remain undefined. After all, any major potential investor in long-term power station projects, where revenues have to be modelled over a lengthy time-frame of perhaps 40 years needs clarity over such key issues. For electricity customers, apart from the widely debated issue of rising prices, there is also deepening concern about security of supply. Holliday himself identified the winter of 2015/16 as being particularly vulnerable to power cuts if the investment hiatus persists, as seems probable. So while National Grid is prospering, the same can hardly be said of UK generation, where investment has stalled. Holliday's warnings may well be prescient – and should be heeded. Nigel Hawkins is a director of Nigel Hawkins Associates, which undertakes investment and policy research 2011 2012 2013 THE BIG NUMBERS* Group operating profit down 1% at: £1,572m Pre-tax profit down 7% at: £979m Earnings per share down 1% at: 20.4p 2013/14 forecast capital expenditure: £3.5bn *Six months to September 2013 Operating profit, Six months ended 30 September (£m) Operating profit UK Electricity Transmission UK Gas Transmission UK Gas Distribution US Regulated Other Activities Operating profit – actual exchange rate Operating profit – constant currency Timing adjustment – constant currency Operating profit – constant currency excluding timing Six months ended 30 September 2013 2012 614 133 456 330 39 1,572 1,572 51 1,623 547 162 408 405 68 1,590 1,597 83 1,680 % change 12 (18) 12 (19) (43) (1) (2) (39) (3) W hy is it that our big six power companies all look, sound and behave the same? Are they in fact one homogeneous provider of a commodity product operating behind different coloured logos? Are their business models so identical that what we hoped for via privatisation and liberalisation are mere aspirations? And has it taken a deep recession coupled with a renewables pandemic for us to recognise this is the case? The answer to all of these questions is yes. There are two principle reasons for this. First, the supply of energy is effectively a commodity business, despite the best efforts of the suppliers to differentiate. Second, none of them are actually big enough or dominant enough in the world market to be a price maker, and so de facto our power and gas are priced on a price taker basis, "We where the underlying should let world market pricing the big six of commodities has to be a "pass through" become rather than an the bigger opportunity for profit. If this is indeed the three" case, then let's accept that there is no real "market" for power and gas. There is an argument rumbling away in Parliament that says the big six are too big, too dominant, and by acting as a cartel are exploiting the poor end user. The only way to deal with this is to smash 'em to little pieces, separating generation from supply. Actually, when you think about it, the problem is the reverse. Our utilities, or rather their balance sheets, are too small. Ever conscious of credit ratings, earnings ratings, and a massive investment programme ahead where capex dwarfs market value, they cannot deal with the storm-surge of market disruption. In France there are just two utilities, EDF and GdF Suez; Italy has two, Enel and Edison; Germany three, Eon, RWE and a rapidly retreating Vattenfall. We have six. Let's run the scenario forward so that the big six become the small 12. Everyone's costs rise and the consumer pays. We should let the big six become the bigger three. Minimise customer choice but provide price stability through regulation. Let's acknowledge that the market model has run its course. Let balance sheets become more robust, credit ratings improve and capital markets embrace the new paradigm. There is no refuge in the illusion of the multiple. Nigel Robinson, Head of Power, Investec Power & Infrastructure Finance UTILITY WEEK | 6th - 12th December 2013 | 21

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