New Year press round-up: Energy firms suggest wholesale price mechanism to ease pain of high prices

Our review of national newspaper coverage of the sector over the festive period includes the latest on negotiations between the energy sector and government, as well as the latest moves by Ofgem to ease pressures on billpayers. Meanwhile, there is analysis of water company investment since privatisation and a report into BP’s withdrawal of support from energy supplier Pure Planet.

Energy firms suggest wholesale price mechanism to ease pain of high prices

Energy companies have pitched a mechanism based on the government subsidy scheme that supports renewable energy generation as one option for protecting British households and suppliers against high wholesale electricity and gas prices, according to people familiar with the proposals.

Talks between energy suppliers and UK business secretary Kwasi Kwarteng will resume on Wednesday as the industry pushes for measures to aid consumers as they face spiralling living costs this year, as well as to prevent further large-scale collapses in the electricity and gas retail sector.

Energy industry executives say a number of proposals have been put forward to ministers as they continue to press the importance of supporting the industry. The sector has been hit by more than two dozen energy company collapses since the start of August under the weight of high wholesale prices.

Analysts warn that energy bills will probably rise more than 50 per cent to £2,000 a year for millions of households in April when Britain’s energy price cap is next adjusted by the regulator Ofgem. This could plunge millions more people into fuel poverty and contribute to a cost of living crisis.

The Resolution Foundation think-tank warned last week that families face a hit of £1,200 a year to their income from April as a result of the sharp rise in energy bills, as well as tax increases.

An emergency virtual summit between Kwarteng and energy chief executives two days after Christmas failed to reach a resolution.

Among the options that energy companies are putting forward is a mechanism similar in design to the “contracts for difference” subsidy scheme that supports the growth of renewable energy, as well as a £20bn fund, according to people familiar with the talks. Both would allow suppliers to spread out the costs of recent surges in wholesale energy prices for consumers over a number of years, but without imperilling their own balance sheets.

Under a contracts for difference-style mechanism, ministers would have to agree with the energy industry a wholesale price level that they believed consumers could tolerate.

If prices rose above that level, suppliers would receive payments from the government. When wholesale prices were below the agreed level, suppliers would return money to the government, meaning the mechanism could potentially be “self-funding”, several people with knowledge of the proposals said. However, the option is unlikely to be popular with MPs who oppose government intervening in free markets.

The Financial Times

Consumers may be spared energy levy to ease pain of soaring bills

Huge increases in energy bills could be slightly less than feared under proposals to delay charging consumers for the costs of suppliers going bust.

Households could be spared from paying a £65 levy that was due to be added to their annual bills from April to cover £1.8 billion of costs stemming from more than 20 supplier failures, under the plans from Ofgem.

Energy bills are forecast to rise by as much as 50 per cent, or £700 to a typical £2,000 a year, when the regulator next updates the price cap for 15 million households in April. The expected increase is driven primarily by record high wholesale gas and electricity prices but the costs of supplier failures were due to add to the pain.

The government and regulator are looking for ways to reduce the scale of the bill increase amid warnings of a cost of living crisis that will push many households into fuel poverty.

Ofgem’s proposals would soften the blow by cancelling next year’s planned levy for the costs of supplier failures and instead recouping it from consumers over a longer period in future years.

More than 20 companies supplying about four million households have gone bust this year as wholesale prices have soared.

With the exception of Bulb, the biggest failure, which is in taxpayer-backed special administration, the other failed suppliers have been handled through an Ofgem process that transfers their customers to solvent companies, known as “suppliers of last resort”.

These companies have incurred extra costs of about £1.8 billion, such as for purchasing energy for their new customers at short notice. The regulator had agreed that these costs could be recouped via a levy on all households via their bills from April, at an estimated cost of £65 per household. Under the proposals yesterday these costs would instead be taken on in the short term by banks or other financial institutions, and would be repaid by consumers over a longer period with interest.

A spokeswoman for the regulator said this would give it and the industry “the flexibility to possibly defer the costs of suppliers of last resort being added to bills from April 2022 and instead be spread over time on bills in future years”.

Ofgem admitted this would increase the eventual total cost to consumers but suggested it would be worth it to ease the pain in April. “The interest and other fees required by that third-party financier would likely mean that the cost to consumers was higher in absolute terms but there could be value for consumers in meeting those costs over a longer time period,” it said in a consultation.

The Times

Tackle cost of living crisis by scrapping energy bill tax, Tories urge Boris Johnson

Boris Johnson has been told he must intervene to address Britain’s cost of living crisis, with 20 Tory MPs and peers calling on him to scrap taxes on energy bills.

Five former ministers are among a group of backbenchers who are calling on Mr Johnson and Rishi Sunak, the Chancellor, to step in amid fears that household energy bills could double to £2,000 by April.

In a letter to The Telegraph, the MPs argued that while a global surge in wholesale gas prices is contributing to the crisis, the UK is causing energy prices to increase “faster than any other competitive country” through “taxation and environmental levies”.

With the cap on energy bills expected to rise by approximately £500 in April, the group warned that the hike will feed “directly into a cost of living crisis for many and push them into what is bluntly called ‘fuel poverty’”.

“High energy prices, whether for domestic heating or for domestic transport, are felt most painfully by the lowest paid,” they wrote.

The intervention will increase the pressure on ministers, who are locked in talks with energy companies and the regulator Ofgem over potential measures to reduce consumer bills.

Urging Mr Johnson and Mr Sunak to use “levers we have to mitigate” the looming increase, the MPs and peers called for the removal of VAT on energy bills, set at five per cent, saying it would be a “small” reduction but a “step in the right direction”.

One of the signatories also pointed that, during the Brexit referendum, both Mr Johnson and Michael Gove said leaving the European Union would allow the UK to reduce energy bills by scrapping VAT.

The letter also called for the removal of environmental levies, used to fund renewable energy subsidy schemes, saying they account for 23 per cent of consumer electricity bills. It is thought the two measures combined could shave up to £200 off the average household bill.

Similarly, the MPs noted that the climate change levy, applied to business energy use, is “making domestic energy intensive businesses uncompetitive and again increases the costs to consumers on virtually everything”.

The MPs also warned Mr Johnson that his net zero strategy must not undermine the UK’s domestic energy supply and urged him to adopt a “new approach to our energy security”.

“We hardly need to point out the risks of reliance on other countries for our energy needs, especially those hostile to us,” they wrote. “This leads to the inescapable conclusion of the need to expand North Sea exploration and for shale gas extraction to be supported.”

The Daily Telegraph

Energy supplier Pure Planet collapsed after BP called in debts

Energy supplier Pure Planet collapsed amid soaring wholesale gas prices after minority shareholder BP called in debts of almost £53m and refused to provide fresh investment, administrators have revealed.

The company, which served about 235,000 customers, was unable to pay the debt and efforts to find other solutions such as a buyer or support from government and regulators also failed, PwC said in a report.

Pure Planet, which bought its wholesale energy from BP, was among the first of 26 suppliers which have gone bust since August, faced with a six-fold increase in wholesale gas prices.

The market meltdown has left behind an estimated £4bn tab for consumers and taxpayers under safety net procedures which pass customers on to another operator so they are not left without energy.

Several companies have faced criticism for not buying energy in advance, putting their business at risk through exposure to volatile costs on the spot market.

However, the administrators’ progress report into Pure Planet reveals that it bought the vast majority of its energy from BP in advance, meaning only a small portion was affected by rising prices.

The company nonetheless started to struggle as wholesale gas costs surged this year, and told BP on September 1 that it expected to make a loss of £25m for the year ending March 22.

This was far worse than the company’s previous prediction that it would break even, which would have allowed Pure Planet to repay loans from BP as part of a long-term agreement.

According to administrators, BP – which reported a profit of $3.3bn (£2.4bn) in the third quarter of 2021 driven by booming oil prices – became worried about its exposure and reviewed its position.

It then told Pure Planet on October 5 that it would not provide additional funding and demanded repayment of £52.8m under its loan facility, effectively collapsing the business.

Discussions with a rival energy supplier about a sale were not sufficiently progressed and “the position of BP left the directors with no alternative but to prepare [Pure Planet] for insolvency”, administrators said.

The Daily Telegraph

Sewage spills highlight decades of under-investment at England’s water companies

While public anger towards water companies has been bubbling for years, it has erupted in the past few months, as unknown quantities of raw sewage and storm water have repeatedly been poured into Britain’s rivers and seas, increasing pressure on the government and regulators to act.

The industry is now facing its biggest wave of protests since it was privatised more than 30 years ago, as campaigners, from the Windrush Against Sewage group in Oxfordshire to Ilkley Clean River in Yorkshire, try to force action from companies and policymakers.

Their efforts have gained support and publicity from celebrities including Feargal Sharkey, whose Twitter campaign helped secure a vote in parliament for action against sewage pollution, and Bob Geldof, who has urged people near his home in a town on the Kent coast to stop paying their water bills.

The biggest focus for campaigners has been storm overflows — the 15,000 pipes that discharge sewage into rivers and seas when it rains.

Despite the unpalatable consequences for swimmers and wildlife, a certain amount of this dumping is allowed under Environment Agency rules. But until recently most pipes were not monitored and water companies were responsible for reporting their own breaches. The environmental watchdog has launched an investigation into whether companies have been exceeding legal limits.

The new Environment Act requires water and sewage companies to reduce overflows, but there is no set timetable or quantifiable targets. The government is required to publish a new plan to reduce overflows by September 2022.

But if the pressure for change is there, the cash is not. Last month, industry regulator Ofwat warned that at least two providers — Southern Water and Yorkshire Water — were in such poor financial health in March that there were concerns over their ability to deliver environmental improvements. Yorkshire Water said its “financial structures are robust and resilient”. Southern has since been taken over by the Australian infrastructure manager Macquarie.

The privatisation of England and Wales’ regional water suppliers 30 years ago came with a promise that investors would deliver much needed upgrades to the nations’ sagging water network.

Although there was an initial rise in spending, as some companies sought to meet European water quality directives, research by the Financial Times showed that total capital expenditure by the 10 biggest water and sewage monopolies had declined by 15 per cent since the 1990s — from £5.7bn to £4.8bn a year.

One exception is Thames Water, which has increased expenditure, although not by enough to stop leaks and burst pipes.

Over the same time the companies — which were sold off with no debt and handed £1.5bn — have borrowed £53bn, the equivalent of around £2,000 per household. Much of that has been used not for new investment but to pay £72bn in dividends.

The concern now is that with high debts to service and ageing infrastructure to maintain, water companies have little financial headroom to improve their Victorian era pipes, even though customers’ bills have risen by almost a third since 1991.

One water industry executive said companies were spending more on “maintaining deteriorating assets than replacing them”. He pointed to the use of water jets to deal with blockages as an example. “These are a poor substitute for improving the wastewater network, and will hasten pipe deterioration,” he said.

Ofwat, which sets limits on how much water companies can raise from bills to invest, said overall expenditure including maintenance had increased by 42 per cent, from £3.9bn to £5.6bn per year since the 1990s. It said some spending, such as on sustainable drainage systems, would not have been included in the overall capital expenditure figures.

There has also been some improvement in transparency around sewage spills, with new electronic monitoring devices being fixed to pipes. Water companies will be required to publish storm overflows within an hour of them happening, which does not reduce pollution but at least helps to protect public health by providing warnings.

But this still does not solve the problem of how to pay for infrastructure upgrades to cut sewage outflows.

A recent government commissioned report estimated the cost of eliminating storm overflows at between £350bn and £600bn — an unrealistic sum for the companies to pay that could add up to almost £1,000 to customers’ annual bills.

Even more minor improvements — such as reducing spills in “sensitive catchments” by three quarters — would likely cost at least £18bn, the report said.

However many companies believe they will be able to make substantial improvements for less.

Southern Water, which received a £1bn emergency equity injection from Macquarie in August, a month after the company was hit with a record £90m fine for dumping billions of litres of raw sewage into rivers and seas, has pledged to halve pollution incidents by 2024 compared with 2019, while ensuring bills do not rise by more than inflation.

It estimates the cost of replacing its total sewage network at a crippling £50bn — but will complete significant upgrades to its existing infrastructure, half of which was built before the 1970s, at a cost of £2bn.

The industry body, Water UK, said it was “pushing the government to encourage Ofwat to authorise schemes that meet . . . environment targets, including ending all ecological harm from overflows, ensuring resilient water supplies, and meeting our ambitious 2030 net zero target”.

But Ofwat said companies “need to focus on improving their performance before asking for more money from customers”. “Water companies have substantial money to invest, with a £50bn package agreed . . . for the next five years.”

The Financial Times

6m UK homes may be unable to pay energy bills after price hike, charity warns

The number of UK households living in fuel poverty could climb to the highest level on record by this spring unless the government moves to soften the blow of a looming record high energy bill hike, according to a fuel poverty charity.

Around 4 million homes in the UK were already classed as fuel poor before a surge in global energy market prices triggered one of the steepest ever energy bill hikes in October, but campaigners are braced for a record increase in the numbers unable to pay their energy bills following another hike this spring.

The charity National Energy Action warned that the double blow to household bills could cause at least 2 million more homes to slip into fuel poverty compared with the start of 2021, taking the total to 6 million households. This would be the highest level of fuel poverty across the UK since records began in 1996.

The looming energy price hike has not yet been finalised by the regulator but Adam Scorer, chief executive of National Energy Action, told the Observer that the number of households in fuel poverty would “skyrocket” in April. This is expected to deepen the UK’s national energy crisis and compound the “year of the squeeze”, predicted by the Resolution Foundation last week, which threatens to trigger a “cost of living catastrophe” for hard-pressed families.

Households are already paying record prices to put petrol in their cars, and can expect the cost of consumer goods to rocket as fuel prices and supply-chain disruptions take their toll on major companies.

“Those on lowest incomes and in less-efficient homes will not just face financial hardship but intolerable living conditions, ill health and, for too many, a shortened life,” Scorer said. “This is not just conjecture. It will happen and we’ve had enough time to see it coming and act.”

Energy market prices climbed steadily over 2021 before leaping to record highs in October and fresh record highs in December. The market rally has fuelled one of the steepest energy price hikes in the history of the UK’s liberalised energy market.

Ed Miliband, shadow secretary of state for climate change and net zero, said: “Working people are being hit by a cost-of-living crisis which has seen energy bills soar, food costs increase and the weekly budget stretched. The government must take urgent action to support those people struggling to pay bills.”

The Guardian

Homes in the UK’s coldest regions pay 66% more for energy bills than in London

Homes in the coldest parts of the UK are spending up to 66 per cent more of their weekly budget on heating than properties in London, research shows.

Areas such as Northern Ireland, Scotland, Wales and Northern England have to spend far more on gas and electricity , the Office for National Statistics has said.

Unsurprisingly, these regions need higher heating bills than warmer places such as London – where homes pay the least in energy bills.

But new research has revealed the scale of this extra spending.

The average property in Northern Ireland spends more than 50 per cent more on energy bills compared to London .

Homes in Scotland and Wales pay 40 per cent to 50 per cent more.

Devon and Cornwall pay just 10-20 per cent extra when compared to the capital, while Kent and Essex pay less than 10 per cent more.

The Daily Mirror

Suffolk wind power opponents threaten UK’s net zero ambitions

The UK’s drive to decarbonise the energy sector faces a big test within weeks when a minister rules on whether two wind farms off a tranquil area of England’s east coast should go ahead despite strong opposition from locals about the onshore elements of the projects.

ScottishPower’s planning application for the two projects off the coast of Suffolk includes permission for cables and two eight-acre substation complexes to be built on land.

The projects will be the latest test of rural communities’ tolerance for hosting the infrastructure that is required to connect to the electricity grid the slew of clean energy projects that are planned for the North Sea.

In February, villagers in the neighbouring county of Norfolk succeeded in overturning approval for another large offshore wind farm proposed by the Swedish company Vattenfall, following concerns over the visual impact of an onshore substation.

The government has set a target of quadrupling the UK’s offshore wind capacity to 40GW by the end of the decade as part of its goal to decarbonise Britain’s electricity system by 2035.

But Suffolk residents have identified at least eight proposed energy projects they claim could “irrevocably damage” the county’s coastal areas, unless the onshore infrastructure to connect them to the electricity grid is co-ordinated and reduced. In addition to new offshore wind projects, National Grid is planning to install several new subsea cables that trade electricity with continental Europe.

Energy companies and environment campaigners acknowledge privately that if it is not handled carefully, local opposition in the east of England could lead to “Onshore wind 2.0”. Former prime minister David Cameron banned subsidies for the development of onshore wind farms in 2016 under intense pressure from Conservative backbench MPs.

This time the opponents include a cabinet minister, Thérèse Coffey, the local MP and work and pensions secretary, who has backed the campaign for alternative sites for the substations.

Doug Parr, chief scientist at Greenpeace UK, said: “The onshore wind industry caused trouble for itself by hoping to railroad local consent. Lessons from that debacle must be learnt — the onshore parts of future offshore wind developments must be justified to avoid being fought by nearby communities.”

Suffolk residents argue the onshore infrastructure required for the two ScottishPower schemes would “gouge a motorway-sized scar” through the fragile cliffs of Thorpeness and the county’s historic coastal towns. They will also require a large substation complex in the medieval Suffolk village of Friston.

The two projects — East Anglia One North (EA1N) and East Anglia Two (EA2) — require a development consent order from business secretary Kwasi Kwarteng by January 6.

The Financial Times

Green Investment Bank sold by government sees profits surge for new owners

The Green Investment Bank — set up with taxpayer funds but controversially sold off four years ago — racked up bumper profits last year in the race to net zero, raising fresh questions about its sale.

Launched in 2012 by the coalition government to help spur investment in green projects such as wind farms, the bank was sold by Theresa May’s government to Australia’s Macquarie for £2.3 billion five years later.

The UK Green Investment Bank reported a £144 million profit for the year ended March 2021, compared to a £34 million profit the year before, according to accounts filed at Companies House.

That led it to pay a £39 million dividend following a £135 million payout to Macquarie in 2020 — its first since it took over the bank in 2017.

It comes six months after the chancellor, Rishi Sunak, launched the UK Infrastructure Bank, just before Glasgow hosted the Cop26 climate change conference. The new bank, run by former HSBC chief executive John Flint and chaired by ex-British Land boss Chris Grigg, will invest in large infrastructure projects, including clean energy. It was launched with £12 billion of capital and a further £10 billion of government guarantees available.

A government spokesperson said: “It is no surprise that the Green Investment Bank is thriving under private-sector ownership given the importance this government places on driving forward the net zero agenda here in the UK and internationally.

“The sale of the bank not only secured a £186 million gain for the taxpayer, but also the future of the bank with an ambitious new owner.”

The Times

Also in the news:

London traders at Russia’s Gazprom cash in on gas price turmoil

The Times (subscription required)

Fury as EU moves ahead with plans to label gas and nuclear as ‘green’

The Guardian

Octopus defies energy crisis to draw global investors

The Financial Times (subscription required)

Juliet Davenport: Good Energy founder spreads her wings and her expertise

The Guardian

Northvolt rolls out Europe’s first ‘gigafactory-era’ car battery

The Guardian

SNP calls for cuts to electricity transmission costs to help Scottish renewable sector flourish

Companies race to stem flood of microplastic fibres into the oceans

The Guardian

Germany shuts down three of its six nuclear power plants a year before ending its use of atomic power and switching to renewables

The Daily Mail

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.