Cost of living hysteria is killing investment

And so to a conference last week, where Liberum Capital’s Peter Atherton, always good value, outlined how Ed Miliband’s size nines in the energy market had wiped £8 billion off the value of UK utilities relative to the stock market in a matter of months. Atherton argued that Miliband’s threatened price freeze broke the longstanding “compact” between government and investors, which was essentially an unspoken agreement that investors would back otherwise financially unsustainable projects to meet policy objectives, while for their part, government would guarantee reasonable returns.

That compact is now in tatters and companies such as Centrica and SSE are suffering the consequences. As other speakers at the Cornwall Energy conference argued, this is just one of the unintended consequences of Miliband’s flat-footed intervention, which has ironically threatened the very survival of smaller, independent suppliers. Whether Miliband miscalculated, was misinformed or more likely, just didn’t care, is a moot point.
The current hysteria around cost of living is so damaging because it takes investors out of the picture. Like it or not, the energy supply industry is dependent upon private capital not just to finance the transition to low-carbon generation, but to keep the lights on in the first place. How much longer will investors gamble on a UK market where politicians can’t agree on how much they should be allowed to make; the regulator could be for the chop; and no-one’s at all sure what happens in 18 months’ time? Regulated utilities fare better: while Ofwat’s proposed 3.85 per cent Wacc squeezes investors, it does at least provide guaranteed returns out to 2020, hence the stable share prices of water companies this week (see p21).
It’s a stability energy suppliers can only dream of. Small wonder that SSE is scaling back its investment in generation (p19), following the lead of Centrica, which recently flogged off Race Bank windfarm and abandoned plans for gas storage. For RWE, with bigger issues on its mind, Npower is looking like an increasingly troublesome investment (p12). Indeed, if there were any likely buyers out there, the sale of at least one of the big six by the end of the year would look like a dead cert.