The stock market is unsure about Centrica’s radical restructuring, but Jillian Ambrose says big changes were inevitable.

Action was inevitable. In many ways, Centrica’s radical billion pound strategy turnaround announced last week came as little surprise to an industry that for years has battled against a changing tide in the energy sector.

However, the sheer scale of the plans outlined in Centrica’s strategy review have reverberated through the industry: after all, the UK’s biggest utility is turning its back on the traditional utility model.

The changes are enormous but simple. Centrica will reduce its focus on centralised energy to the tune of £1.5 billion over the next five years and plough this capital into the business areas that offer the greatest potential for growth. For Centrica, this means leveraging its majority hold on the supply market and capitalising on the momentum it has already generated in service and technology offerings.

The move towards decentralised energy and a greater focus on the consumer has been welcomed by the Association for Decentralised Energy and consumer groups alike, and also makes sense on paper.

Centrica reported its first-half-year financial results alongside the strategy paper showing that Centrica Energy’s operating profit plummeted from £526 million to £116 million, while British Gas posted first half operating profit of £656 million this year, up from £455 million in the first half of 2014.

In a cash-constrained reality, something had to give, says Jefferies utilities analyst Peter Atherton.

“The previous strategy had to change and it is the logical thing to reallocate funds to an area which is less capital intensive and could still deliver growth. But outlining a new plan is very different to implementing it, and there will still be challenges that need to be addressed around falling energy demand, low commodity prices, new competition in both the UK and US markets as well as political risk,” he said.

Risk, and the stark view of what Centrica will be up against in implementing its new regime, may have been playing on the minds of investors as shares in the company plummeted 6 per cent on news of the overhaul.

Although profitable, British Gas remains plagued by headlines baying for further retail prices cuts, while the CMA continues to investigate the use of standard variable tariffs, an issue British Gas is particularly affected by given the size of its customer base. For Centrica to turn its downstream business into a true success story rather than simply a cash cow, it won’t be able to rely on a business-as-usual approach.

But chief executive Iain Conn seems up for the challenge. “It’s the way the world is going,” he said following the announcement.

The shift echoes moves from Germany’s Eon, which has gone as far as siphoning off its centralised energy portfolio into a separate business to focus on consumer-facing technology developments.

France’s GDF Suez has also indicated a shift towards a low-carbon future with its rebrand to Engie, while RWE has looked to Silicon Valley to reinvigorate its customer-facing technologies. With Centrica following suit there can now be no doubt in which direction that the utilities industry is moving.

Plugging the management void

Centrica’s much-anticipated strategy overhaul concluded the six-month review that began early this year, but the company has also quietly drawn a line under its lengthy 18-month management overhaul.

On the eve of the report’s publication, Centrica appointed Jeff Bell as its chief financial officer and a member of the board, a role he has held in an interim capacity since September. His appointment was the final fix to Centrica’s feared “management void”, which threatened to leave the company rudderless last year. First, chief financial officer Nick Luff was poached by Reed Elsevier in January 2014, followed by news in May that British Gas boss Chris Weston would back out of his role after just 15 months, while speculation swirled that Sam Laidlaw would step down as chief executive of the group.

Laidlaw’s departure was confirmed in July 2014 with news that former BP boss Iain Conn would take the reins, but it was only in April this year that a permanent replacement was found for Weston in the form of former Aviva boss Mark Hodges.

GOING UP:

Supply

Centrica’s supply business was one of the few areas to outperform on expectations and the company says it intends to drive further growth through cost efficiency and improved customer service.

B2B Services

Centrica plan to spend an additional £700 million on its business services activities, including energy efficiency, flexible generation and new technologies, alongside energy management systems and optimisation in this area over the next five years.

Connected Homes

Centrica expects to invest £500 million in operating costs and capital expenditure in this area over the next five years, in capacity and capability.

GOING DOWN:

E&P

Centrica will focus on maintaining a smaller E&P business of between 40-50mmboe per annum (from current levels around 75mmboe), focused on the North Sea and East Irish Sea, consuming £400-600 million of annual capital expenditure.

Wind

Centrica will exit its remaining wind power joint ventures, which represent total operational capacity of 245MW including 50 per cent stakes in the Lincs offshore windfarm (270MW), the Lynn and Inner Dowsing windfarms (194MW) and half of the 26MW Glens of Foudland onshore project in Scotland.

Staff Numbers

The move will result in a significant blow to the company’s workforce, which will see 6,000 jobs slashed before subsequent job creation of 2,000 brings the net impact to a headcount reduction of 4,000.