The hits and misses of 2013

It’s been a big year for utility companies, and ends with energy taking an unexpected and unwelcome high profile. The Utility Week team takes a look back at some of the highs and lows.

When Ed Miliband took to the stage at the Labour Party conference in Brighton in September, little did the energy industry know that life as they knew it was over. Miliband’s “price freeze wheeze” may have provoked those in the know to accuse him of scribbling policy on the back of a fag packet, but it caught the public imagination.
Miliband’s approval ratings shot through the roof as he seized the “cost of living” high ground and the Conservatives and Liberal Democrats were left scrambling to catch up. The energy suppliers fought back, arguing that price hikes reflected the bundle of charges now generally known as “green levies”, but including payments for the fuel poor and energy efficiency as well. After a few weeks of furious leaking, lambasting and internal struggles in the coalition government, chancellor George Osborne did an early Christmas turn as Santa Claus, handing voters an estimated £50 off their energy bills through a combination of watering down and extending green and social obligations on energy companies, shifting some charges into general taxation, re-announcing network price cuts, and rounding it all up to a nice even sum with a £12 per household government rebate. As Labour scoffed that the government was “giving in to” the energy suppliers, and the big six promised to scale back planned price rises, one thing was for sure: this one’s going to run and run.

Biomass

It’s been an emotional 2013 for the biomass sector. Under fire from environmental non-governmental organisations peddling concerns about the sustainability of burning “whole trees”, the emerging industry became divided. The government confirmed coal-to-biomass conversions as a favoured renewable technology while killing off dedicated biomass power-only plants.
As Drax switched its first burner from coal to biomass, those planning to build new biomass plants were left to scrap over the last guaranteed Renewables Obligation subsidies, which were capped at 400MW. A year ago, the Department of Energy and Climate Change (Decc) estimated there were 1,000MW of such projects in the pipeline. At the last count just two, worth 73.5MW, had applied for support. What would have happened without all the policy uncertainty, we’ll never know.
Those hoping the capped Renewables Obligation would give way to renewed support under the successor subsidy regime were disappointed. In July’s draft Electricity Market Reform plan, Decc said power-only biomass would not be eligible for contracts for difference. It argued that biomass was not a cost effective way of cutting carbon.

The Energy Bill

As this final issue of Utility Week this year goes to press, Parliament is on the verge of signing off the Energy Bill. It cannot come too soon for the industry, eager to end the uncertainty that dogs the market.
While it has generated much debate, the legislation emerges largely untouched by Opposition amendments. A broad-based campaign to add a 2030 decarbonisation target to the Bill was narrowly voted down in both Houses of Parliament. To everyone’s surprise, the Lords managed to tack on tighter restrictions to coal generation, although this was reversed in the Commons.
Much of the detail around Electricity Market Reform will be in the secondary legislation that remains to be thrashed out, however. It puts significant control over the generation mix in the hands of government, rather than the market. The political implications were in evidence this month, with the announcement offshore wind would get higher subsidies at the expense of onshore wind. Backing the more expensive technology means less carbon reduction for bill-payer’s money, but curbing onshore wind plays well with certain Conservative MPs.
In 2014, we will find out if the reforms have achieved their goal and bring on the investment needed to replace aging coal plant with greener forms of generation.

Green Deal

It’s been a restless 2013 for climate change minister Greg Barker, who told Radio 4 at the start of the year: “I wouldn’t be sleeping if we didn’t have 10,000 [Green Deal packages in place] at the end of the year.”
With the end of the year in sight, the latest figures revealed that, while a total of 101,851 Green Deal assessments were lodged up to the end of October, only 219 measures had been installed, with another 954 packages in the system.
All year Barker has been saying that the scheme is still in its “early stages” and it is designed for the coming decades, so needs to grow steadily. But the criticisms of the scheme kept coming – both from industry and across the dispatch box. The interest rate is “too high”, the process is “too complicated”, and there are worries from homeowners about attaching a new debt to their property.
Solutions offered up from Labour and the industry include cuts to stamp duty and council tax for energy efficient homes.
After months of seeing the Green Deal struggle to get going, it has been given a shake-up, with new home owners being given £1,000 to put towards energy efficiency improvements.
Yet homeowners still appear reluctant to sign up. Barker looks set to see in the New Year suffering from insomnia.

Liquidity

One of the most divisive issues in the industry, wholesale power market liquidity has been fiercely debated for years. It inspires as many opinions as there are market participants. A number of independent players complain that a lack of liquidity makes it hard for them to compete with the big vertically integrated companies, which can sell power to themselves. Some of the major suppliers denied there was a problem and argued intervening would be costly.
Among those who agreed something should be done, the proposed solutions were many and various. They ranged from a self-supply restriction, forcing the big six to trade all their power on the open market, to mandatory auctions.
In November, after several consultations, Ofgem finally cut through all the disagreement and set a course to enshrine its preferred solution in company licences. It has published a statutory consultation on a “secure and promote” condition. This places a market-making obligation on the big six and requires the eight largest generators to help independent suppliers access the market. If all goes smoothly, this will kick in on 31 March. It will not please everyone, but after all the conversation, a little action will be refreshing.

PR14

As the year draws to a close, water company bosses are left exhausted from the rounds of public consultation they have undergone this year as they grappled with the demands of PR14, a very different approach to regulation. Despite arguments over whether Ofwat should have been clearer about its expectations, water companies have grasped the nettle of PR14, getting their business plans in for the 2 December deadline and, with the odd notable exception, dutifully proposing price rises in line with or below inflation.
Regulatory regime change
Was it something we said? The carousel swung round at both Ofwat and Ofgem this year, with some departures more surprising than others. Jonson Cox, who arrived in late 2012, made his arrival felt with a cage-rattling speech in March that set out his agenda. Plans went slightly askew when the chief executive you love to hate, Regina Finn, announced her departure months earlier than expected, smack bang in the middle of preparations for the price review.
As Ofwat shamefacedly announced that it had got its sums wrong to the tune of £10 million for the cost of the review, senior staff rallied round and companies stumped up the difference. Cox moved quickly to appoint Cathryn Ross to replace Finn and as the year draws to a close, Ofwat seems in a stronger position than it could have dreamed possible six months ago.
Not so at Ofgem, where the sword of Damocles hangs over everyone’s least favourite regulator. David Gray took over from Lord Mogg as chairman this autumn, but has yet to make any notable public statements, and is still on the hunt for a replacement for Alistair Buchanan, who departed this summer for a comfy chair upstairs at KPMG. Hot favourite for the job, acting chief executive Andrew Wright, ruled himself out in December, leaving the field wide open for what is possibly the most unpopular job in regulation.

Retail Market Review

Despite being trumped by David Cameron in the quest for headlines following the prime minister’s promise to legislate suppliers to put consumers on to the cheapest tariff, Ofgem proudly unveiled its Retail Market Review (RMR) proposals – saying they would make the market “simpler, clearer and fairer” for consumers.
Under Ofgem’s plans, this translated to any consumer being left on a bad value “dead” tariff being transferred to their supplier’s cheapest evergreen tariff.
However, at the heart of the RMR proposals is the cap on the number of “core” tariffs to four per payment, fuel, and meter type.
This has prompted a number of suppliers to remove some of their tariffs, including some of the cheaper offerings, with SSE among those that pulled the plug on some of its discounted tariffs.
Npower went one step further than removing some of its tariff options and sold half a million customers as a way of circumnavigating the imminent tariff cap.
The £218 million deal with Telecom Plus – owner of Utility Warehouse – saw Npower offload 770,000 of its electricity and gas accounts to ensure the two parties did not fall foul of the four tariff cap.
Most of the RMR reforms will be in place by the time Big Ben tolls to signal in 2014, although white label suppliers will have an additional year to ensure they comply with Ofgem’s “radical” shake up of the supply market.

RIIO

National Grid and the gas distribution networks have been through the RIIO mill and in 2013 it was the turn of the electricity distribution network operators (DNOs). Ofgem’s all-singing, all-dancing new regulatory model calls on these monopolies to innovate, find efficiency savings and – most radically – talk to their customers.
The DNOs did their homework and all pitched in price cuts for the 2015-23 period when they submitted their business plans in the summer. This was in no small part down to the accounting expedient of depreciating their assets over a long period of time. There are concerns from the renewables sector that some DNOs are planning to accommodate unambitious levels of low carbon technology. Still, a price cut is a price cut and it’s an enviable top line in this climate of heightened anxiety over energy bills.
Ofgem was pleased with the industry’s efforts and in November anointed Western Power Distribution (WPD) queen of the RIIO carnival. WPD, which covers the South West, Midlands and South Wales, enters 2014 on the regulatory fast-track. Electricity North West and Northern Power Grid were asked to look again at their costs while UK Power Networks, SSE Power Distribution and SP Energy Networks have a lot more work to do before resubmitting their plans in the spring.

Severn Trent

Analysts watched Severn Trent with hawk-like interest this summer as it managed to rebuff three takeover bids from a Canadian-led consortium.
The Long River consortium finally walked away from the bid because of an “absence of any meaningful engagement with the water company” after its third, £5.3 billion, bid was turned down on 7 June.
Smart meters
The great hope for re-engaging consumers with the energy market, bringing down energy costs, boosting switching rates, reducing overall energy consumption, and opening up the brave new world of the smart home is smart meters.
However, the industry was worried that the “ambitious” rollout of 54 million smart meters may have become unfeasible.
The government eventually gave in, announcing that the nationwide installation programme would be shunted back by a year – with the final deadline put back to 2020. But there has been some progress, with the all-important data and communications system contracts, worth £2.4 billion over 15 years, awarded to Telefonica, Arqiva, Capita, CGI, and Gemserv this autumn.
Thames Water
Thames Water’s bids to fund the Thames Tideway Tunnel have not won it many friends this year. The company was within its rights to apply for an interim determination to add 8 per cent to bills in 2014/15 – but Ofwat turned it down in no uncertain terms, even threatening to claw back money. Its subsequent price review submission, the only one from a water and sewerage company to propose price rises, garnered yet more negative publicity.