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UTILITY WEEK | 24Th - 30Th OcTObEr 2014 | 21 Finance & Investment B rent crude oil has moved sharply lower since the start of September, dropping from $105/bbl to $85/ bbl. While the direct impacts on utilities may be modest, the weak global economy and falling inflation are more fundamental issues for the sector. The drop in oil is not as precipitous as it seems at first glance. While oil for January 2015 delivery has dropped $20/bbl, oil in sterling for 2018 delivery has only eased from £59/bbl to £56/bbl. The oil price curve is upward sloping, suggesting some of the weakness may be short- term rather than structural. The weaker pound against the dollar is also mitigating the price move. Nevertheless, one of the drivers of oil price weakness is the weak global economy. Inflation figures around the world have been dropping, including in the UK, whose annual consumer price index (CPI) inflation fell from 1.5 per cent in August to 1.2 per cent in September. Retail price index (RPI) inflation was more robust, at 2.3 per cent, down from 2.4 per cent in August. Breakeven RPI inflation (the future inflation rate at which real and nominal govern- ment bonds give the same return) to 2022 dropped from 3 per cent to 2.8 per cent. What does all this mean for utilities? Despite the lower oil price, there will still be cost pressure for a retail energy price increase before Labour's price freeze promise ends in 2017. UK gas prices would have to move down signifi- cantly to offset rising costs from renewable generation, network investments and energy efficiency spending. The drop in CPI inflation highlights the importance to regulated networks of retaining indexation to RPI. Any renewed discussion of a switch to CPI inflation aer the next price control would make investors nervous. Weakening inflation generally means now is a great time to be contracting for capex projects – achieved project delivery costs may out turn significantly below estimates made using historic price metrics. What is not yet clear is whether equity investors are willing to accept lower returns in a world of low inflation and low interest rates. Equity markets, including utili- ties, have moved lower over the past month, suggesting that not all investors are convinced that lower returns will be fully compensated for by a lower cost of equity. Martin Brough, utilities equities analyst, Deutsche Bank "Despite the lower oil price, there will still be cost pressure for a retail energy price increase before Labour's price freeze promise ends in 2017." Investor view Martin Brough Indexation to CPI inflation would make investors nervous Nothing sure as green taxes Green taxes are not going away, but businesses can do a lot more to reduce their energy consumption. G reen taxes, energy costs and UK competitiveness once again made headlines during the Liberal Democrat party conference. Business secretary Vince Cable stated his view that as a result of green taxes on energy, UK businesses are struggling to com- pete with international rivals. It is a view that many in the business community agree with. Take a recent Npower poll of senior busi- ness leaders in the UK, which showed them to be highly sceptical that the case had been made for the govern- ment's energy policy. Fiy-nine per cent of respondents were not confident that current energy policies reflect the needs of business in Britain. This scepticism was particularly strong when it came to green taxes. Eighty-one per cent ranked afford- ability the most important energy- related issue for their business, well ahead of the move to a low-carbon economy (41 per cent). As Cable admitted, criticism of green taxes on the basis of competi- tiveness does not take account of compensation the government pays to energy-intensive industries. However, it does point to an important fact: the government and the wider energy industry must work together to better educate businesses about energy policy, particularly when it comes to competitiveness. There is also another way of looking at this issue. The green agenda is not going away and bills are only going to increase. Businesses need to accept this reality and work with energy providers to bring down the cost of energy in other ways – particularly through energy effi- ciency measures. We have calculated that UK businesses can save up to £4 billion in energy costs if they reduce energy consumption by 20 per cent. Such a reduction in consumption can be achieved through simple measures, such as investing in on-site energy generation, educating employees on energy efficiency and recycling energy waste. Each business will have its own energy profile and its own ways of driving efficiency, but we strongly believe that most businesses will be able to achieve the 20 per cent target. As a result of green taxes, energy prices are going to rise, but costs to businesses need not do so at the same rate. We believe that through a real commitment to efficiency, UK plc can remain competitive while helping to reduce carbon emissions. Wayne Mitchell, head of industrial and commercial, Npower Blog Wayne Mitchell "Businesses need to work with energy providers to bring down the cost of energy"