Utility Week Lobby: The X factor

The country is going to the polls three years early as Theresa May seeks a direct mandate from the people, but is the election good or bad news for utilities?

There was an end of term buzz in Parliament last week as it prepared to break up. Greg Clark, the business and energy secretary, got in the mood by dispensing warm wishes to Iain Wright, the Labour chair of the department for Business, Energy and Industrial Strategy (BEIS) select committee, following the latter’s announcement that he is stepping down as an MP at the upcoming snap election (see interview, p6).

Clark could probably afford to be magnanimous. With the Tories around 20 per cent ahead in the polls, the main question exercising pundits is how big the Conservative majority will be rather than whether the current government will win a fresh term.

The bad news for utilities – most notably in the energy sector – is that the election means fresh delays in areas that are already bedevilled by hold-ups. 

The so-called purdah period, during which government departments are prevented from making announcements, has already kicked in. By the time Parliament reconvenes after 8 June, the summer recess will be just over a month away (see timeline).

Once time is factored in for appointing new ministers and bringing them up to speed, the hiatus in decision-making could easily extend until the end of the party conference season in October.

Clark has earned good reviews during his spell heading BEIS, so could easily be in line for a promotion by May who is understood to trust him – some even think he might offer an alternative to Hammond as chancellor. He sits on more Cabinet committees than any other minister, and Hammond damaged his standing with May with his self-employed tax rise boob in the Spring Budget.

Whoever heads the Treasury, they will need to deliver a decision on the future of the carbon price floor, which has been kicked into touch during the past two Budgets. The need for this is pressing. The next round of T4 auctions, which are scheduled to take place at the end of this year, will cover 2020/21, when existing arrangements will already have elapsed.

“It’s getting to the point that if it’s not clarified, generators bidding into the next carbon market won’t know the price for the year they are bidding for,” says Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit.

In addition, there are a whole raft of BEIS policy areas where decisions are long overdue, including the emissions reduction plan and the government’s small nuclear reactor competition. Then there’s all the ongoing work which will get shunted backwards, most notably the smart and flexible energy systems investigation being conducted
with Ofgem.

The flipside to all this delay and uncertainty is that a big win for the Conservatives on 8 June could usher in a period of the policy stability, which the industry craves. May has been constrained so far by the fact that she has been governing without the authority of her own mandate. A fatter majority would enable the prime minister to put her own stamp on the government.

But not all clarity is welcome. For energy retailers and many environmentalists, greater visibility of May’s plans is likely to be hard to stomach. For the former, the relentless swing towards populist politics means price regulation is now reportedly a manifesto commitment, while the environmental lobby is nervous that 2020 targets for renewables deployment will be for the chop after the Great Repeal Bill.

Climate change commitments are unlikely to make the final cut of the main manifestos in this election however. Hastily cobbled together, they will largely be rhetoric heavy, content light and short. At time of going to press, one Conservative source told Utility Week that work has hardly begun on his own party’s manifesto. Nevertheless, it will soon be in the public domain.

Energy under the cosh

The snap election announcement was barely hours old before Utility Week began hearing a litany of concerns from a wide variety of energy sector players about the impact it will have on key areas of policy work.

The future of carbon pricing, emissions reduction, small modular reactors, the levy control framework, competitive tendering for onshore transmission (Cato) and smart grid strategy. All these and more have been raised as areas vulnerable to delays, which could damage investor confidence.

Optimists have countered some of these concerns with reassurances that Ofgem will be able to push ahead with more technical issues, like the embedded benefits changes and the regime for Cato. Fewer hopes are held out for the smooth running of the smart and flexible energy systems consultation Ofgem is conducting in partnership with BEIS.

It seems inevitable that nothing more will now be heard on this key piece of work, which is due to set out remedies to problems like the classification of energy storage, and suggest models for transforming the role of distribution network operators, until the autumn.

On the other hand, the election is likely to fast-track intervention in energy retail pricing, giving rise to a raft of work for the regulator. The day after May’s election announcement, Clark promised “muscular” action to stop utilities introducing inflation-busting prices rises. Over the weekend, this has reportedly escalated into a manifesto commitment.

The Department for Environment, Food and Rural Affairs (Defra) revealed a largely innocuous strategic policy statement to Ofwat in March. The document did commit to come to a conclusion on the introduction of domestic water competition “at the end of the Parliament or early in the next one”, but few expect this to be taken literally in the light of the unexpected general election, and although Labour has expressed strong opposition to water competition in the past, it will have more pressing issues to deal with.

There were no unpleasant surprises in the strategic policy statement, and industry commentators seem sanguine about the sector’s ability to hold a steady line in ongoing areas of change. Indeed, contrary to the consternation many energy sector leaders are feeling, one water sector chief executive told Utility Week the snap election would have a “mildly positive” impact on business.

One boon for the sector is that the election will reset the political cycle in a way that decouples general elections from water price-setting – reducing the likelihood of water prices and company dividends becoming populist bandwagons during campaigns.

Second, from an investor point of view, the uncertainty in the energy sector about the future of subsidy regimes, competition, and general policy, means the relatively clear and stable water policy environment will give regulated water companies heightened appeal. Even more so at United Utilities, Pennon and Severn Trent, whose dividends are linked to inflation, which is set to rise out to 2020.

If there is a source of concern for water companies, it is that the election will slow the progress of the Digital Economy Bill, a piece of legislation that is also important to the energy industry.

Michael Roberts, chief executive of Water UK, says the bill is “vital to enabling water companies to help their customers by using data from government departments like the Department for Work and Pensions to target assistance more effectively and efficiently”.

By the time this issue lands with readers, it will be clear whether this bill, due for parliamentary debate on 26 April, has become a casualty to the distractions of the general election or not.

Back at Defra, the one person who may be concerned about clarity and continuity is its leader, Andrea Leadsom, who was gifted the department after her aborted shot at being prime minister last year. She has kept a fairly low profile in the role, doing nothing obvious to place her in any firing lines May might set up after what most are assuming will be her victory. But that may not be enough to protect her from a reshuffle.

Industry comment:

Simon Virley, head of power and utilities, KPMG

“The risk for investors in the energy market of the forthcoming election is of further delays to key decisions that are pending, like the future of carbon pricing, the Government’s emissions reduction plan, or the Ofgem decision on embedded benefits.  Further delays in these decisions would only add to the uncertainty faced by investors.”

Peter Emery, chief executive, Electricity North West

“Calling an election has the potential to delay or put pressure on the development of energy policy.  Any delays are frustrating for companies like Electricity North West as we understand the need to develop and rapidly deploy innovative energy solutions and this is inextricably linked to the policy agenda.  Our priority is to support BEIS and Ofgem to ensure that the sector continues to be well-placed to meet the changing needs and expectations of our customers.”

Michael Roberts, chief executive, Water UK

“We hope that the Digital Economy Bill will complete its passage through Parliament when it is discussed on Wednesday 26 April. The amendments are vital to enabling water companies to help their customers, by using data from government departments like the Department for Work and Pensions to target assistance more effectively and efficiently.”

Nina Skorupska, chief executive, REA

“While it is frustrating that a number of key consultations have been delayed, we are movingly quickly to inform and educate where possible.”