Utility Week

UTILITY Week 8th January 2016

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

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Finance & Investment This week Sludge 'riskier than water' in new market Analysts say different market mechanism for sludge will add to competition costs Sludge services are the riskiest in the new water market, and water resources are consider- ably safer, according to analysts at PwC. In a report for Ofwat, the consultancy said the setting of "gate prices" could increase total risk because they are likely to reflect the full economic costs of sludge activity and add to competition risks. "For sludge the proposed new market mechanisms are likely to take a different form to that of water resources, through the application of a gate price rather than an access price," PwC said. "For entrants provid- ing sludge services, the price paid or received is a gate price paid by the incumbent wastewater business to the entrant to undertake the sludge activity." This would place downward pressure on gearing where the reform created an environment most similar to that of a fully competitive market. Ofwat is consulting on its Water 2020 programme, which is intended to change the regulatory framework and facilitate the introduction of new market structures in wholesale water and sewerage services in England. PwC reviewed the reform options and suggested there were some "potentially significant" impacts on the cost of capital and required returns without further regula- tory protection. "This could result in significant value impacts as well as regulatory uncertainty for investors." It suggested one way of dealing with these risks was to make changes to the regulatory regime, including allowing a higher cost of capital. LV ENERGY GIB's green identity must be protected The UK Green Investment Bank (GIB) must not be priva- tised unless the government can ensure its green identity will be protected, according to the Environmental Audit Com- mittee (EAC). The committee slammed the government for deciding to privatise the GIB "without due transparency", publication of relevant evidence, consultation or considering the alternatives. The risks of privatisation include a shi in focus away from complex projects that struggle to find funding in favour of easier, more commercial projects, and investment in areas that may damage its reputation and undermine its leadership role in the green economy. The EAC said more robust safeguards are needed to protect the GIB's green identity, and called on the government to establish a "special share" to protect it. ELECTRICITY Tempus raises £3.8m for smart supply Tempus Energy has secured £3.78 million from its latest fund- ing round to develop a flexible smart electricity supply model. The investment, which has been raised from high net worth individuals and existing share- holders, brings the total funding secured by the company in 2015 to just short of £5 million. Chief executive Sara Bell said: "Using our innovative supply model to unlock better value from UK energy is good for customers. "I am motivated by the fact that every time we lower our customers' energy bills, we are empowering other British busi- nesses to be more competitive in their own markets." WATER Welsh Water changes will not affect ratings Proposed changes to the structure of Welsh Water will not change the company's debt ratings, according to analysts at Fitch ratings agency. Welsh Water is discussing a new structure for the group – including a new holding company above current holding company Glas Cymru – with its members. Fitch Ratings affirmed Welsh Water's senior secured class A debt and class B debt rating at 'A' and its class C debt at 'BBB+', saying: "The affirmation reflects our expectation that Dwr Cymru [Welsh Water] will maintain adequate financial metrics for the ratings, despite the material reduction of earnings for the cur- rent regulatory period from April 2015 to March 2020 (AMP6)." Gate prices reflect full cost of sludge activity UTILITY WEEK | 8TH - 14TH JANUARY 2016 | 21 European utilities share price performance in 2015 20% 10% 0% -10% -20% -30% -40% -50% 2015 UTILITIES SHARE PRICE PERFORMANCE BY COUNTRY (%) Spain Italy UK France Germany Analysts at investment bank Jefferies said the UK utilities sector avoided heavy share price losses in 2015 because of the performance of electricity network companies, including National Grid. In 2015 the best countries to invest in were Spain and Italy, the analysts said. "Spain has been driven by the very strong performance of Iberdrola (up 18 per cent). Italy has seen a broad-based recovery with all stocks up over 10 per cent. In the UK, a good performance from the network stocks (especially National Grid) has mitigated the fall in the energy-facing stocks. In France, a very strong performance from the environmental service companies has partially offset energy stock weakness," a note from the analysts said. "Germany has just been woeful," Jefferies added. Source: Jefferies estimates, Bloomberg 15% 13% -4% -9% -43%

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