Utility Week

Uberflip 17 01 14

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

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Finance & Investment difficult conversations with investors ahead. But, as one said: "Investors are pragmatic. They understand the process and recognise the political environment." Taking the fast track Ofwat has introduced the carrot of "enhanced" status for those companies that have fully justified their business plans, meaning they will be fast-tracked through the process. How has this incentive affected companies' approach? The water company representatives certainly felt it was a prize worth fighting for, if only because it would reduce the massive amount of work entailed by the review, freeing management time to get on with the job of delivery. "With 90 per cent of the plan in place, you can just get on with it and run the business," said one. There was less clarity about the potential financial benefits of being fast-tracked. Several delegates believed that the prospect of enhanced status has introduced a greater degree of competitive tension between the companies, which was seen as a good thing. Above board One area where Ofwat is seeking significant changes is in the role of water company boards. The regulator believes some boards are too big, or too dominated by investor representatives. It also believes that in some cases they have been too remote from the running of the organisation. It has sought to address this by publishing a new set of guidelines on corporate governance, and insisting that boards sign off on the business plan. This has had a "big impact," according to delegates. Most companies were fairly positive about the changes, particularly about the higher profile now being taken by nonexecutive directors within the organisation, and with customers. One said: "This is by far the greatest leadership and engagement with the process the board has ever had." Future gazing There is life after PR14, and water companies and regulator alike need to look forward to the middle years of the cycle, and indeed to the next price review. Delegates thought the most significant change in dayto-day working would be the greater role of customer engagement, and were looking at various ways of continuing this. With the focus on affordability, there were concerns that research and development budgets, already squeezed, would suffer – and this would have serious consequences going into PR19. In summary, delegates were positive about PR14 and optimistic about the new ways of working it has bought to the sector. Questions remain around totex, enhanced status and the continuing role of customer engagement – the next few months will be crucial. Analyst view Martin Brough "While Europe debates measures to push the carbon price up, the UK may well be debating measures to bring it down in the March Budget." T he next few months could be crucial for the future of UK and European carbon pricing. The European Union Climate Change Committee finally agreed to backload (delay) emissions allowances this month, with hopes that the measure can be introduced in March. But the European carbon price still languishes at around €5/tonne. With an accumulated surplus of around two billion tonnes, delaying the auctioning of 900 million tonnes of allowances between now and 2016 looks unlikely to be enough to tighten the market. The Commission is due to come forward with proposals for more radical structural reform of the market shortly, but political acceptance may depend on the outcome of the European parliamentary elections in May. With coal generation now so much cheaper than gas, the carbon price would have to rise from €5/tonne to €45/tonne to encourage generators to switch to the cleaner fuel. LowerThis could double the German carbon gas wholesale power generation price at a time may not when competibecome more tiveness is a key concern. profitable While Europe than coal any debates meastime soon ures to push the carbon price up, the UK may well be debating measures to bring it down in the March Budget. The government has already legislated to push the UK carbon cost up to £20/tonne (in 2009 money). The current published path will push it up to £30/tonne in real terms by the end of the decade. Will George Osborne reduce the carbon price path to ease pressure on energy bills? Will Labour promise to cut the UK carbon price if elected? At the moment, the measure raises significant revenue. However, the tax take will start to fall towards the end of the decade if the price rises high enough to cause generators to switch from coal to gas. At this point bills will be pushed up while tax revenues will fall. Will this be too high a price to pay for lower emissions? What is clear that for investors and chief executives of energy companies there is still not enough certainty in the future of carbon pricing. Lower-carbon gas generation may not become more profitable than coal any time soon. Martin Brough, utilities equity analyst Deutsche Bank UTILITY WEEK | 17th - 23rd January 2014 | 19

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