Weekend press round-up: Ofgem chief calls on ministers to rethink energy price caps

In our latest round-up of the weekend’s national news stories, Ofgem chief Jonathan Brearley suggests the energy price cap, which he describes as “very broad and crude”, may no longer be fit for purpose. Elsewhere there is criticism over Northumbrian Water’s finances and both Octopus Energy and Good Energy make the case for heat pumps in homes.  

‘Change is needed’: Ofgem chief calls on ministers to rethink energy price caps

In less than a fortnight, Ofgem’s chief executive will set the price that 29m households will pay for their gas and electricity this winter – but Jonathan Brearley appears unconvinced that the energy price cap is the best way to help hard-pressed bill payers.

In what could herald a shake-up of Britain’s energy market, Brearley is calling on ministers to rethink whether the “very broad and crude” price control used to keep bills in check for the past four years is still fit for purpose in a market upended by the energy crisis.

In the past two years, wholesale market prices reached record highs, pushing up the number of households living in fuel poverty to almost 7.5m and causing the collapse of almost 30 energy suppliers. The crisis triggered one of the biggest government bailouts since the financial crisis as ministers handed £78bn to households to help pay their bills.“

The price cap was designed for a market that was much more stable – so, pre-2020 – and it worked quite well,” says Brearley. “But in this volatile market, the price cap has costs as well as benefits, so we would welcome a debate on the future of pricing regulation.”

His call for a “more rigorous framework” to support households comes amid growing concern in some quarters that the energy price cap, legislated by the government in 2019, may now be doing the market more harm than good.

“It’s not for us to decide,” he says. “It’s ultimately for ministers. But it’s important that collectively we understand that a very broad and crude mechanism is going to have risks as well as benefits.”

One solution that has found broad support across the industry and at Whitehall is a social energy tariff. Unlike the price cap, the tariff would be set below the cost of supplying energy, so that households in fuel poverty could better afford their bill.

“We work with government on all options, including a social tariff,” says Brearley. “I think we are clear that a more rigorous framework of providing support for customers is needed. But, in a sense, I accept that the government has a set of dimensions to think about that I don’t have to think about.”

The energy price cap was designed to put an end to rip-off energy tariffs by fixing how much suppliers can charge based on an estimate of their costs. But as costs have soared, the cap has offered little protection against the rise in bills for the millions plunged into fuel poverty. In an energy crisis, a fair price is not the same as an affordable one.

There have been unintended consequences, too. The price cap has been blamed for the collapse of almost 30 small suppliers, at an estimated cost to households of £2.7bn, because they were forced to sell energy at a loss for months before the price cap was updated.

“The truth is, in a market that was more stable, the price cap did its job,” Brearley says. “The way it’s configured right now is one that is hard to adapt to the world changing around us.”

Ofgem has since tweaked the price cap to allow suppliers to recoup the losses sustained last year and remain attractive to investors in the future. The change handed suppliers record earnings for the first half of this year, igniting fierce criticism from consumer groups.

However, Brearley insists that it was the right thing to do. The price is designed to allow suppliers to recover reasonable market-wide costs, and the sudden market price increase had not been taken into account, he says.

“The question is, and it’s an open question: are there alternatives? Are there other ways of doing the same thing?”This question runs through the core of Brearley’s leadership at Ofgem, which began in early 2020. Since then, the industry has been roiled by the impact of the Covid pandemic and the energy market aftershock following Russia’s invasion of Ukraine.

Today, millions more households are in fuel poverty, vulnerable bill payers have been forced on to prepayment meters, small businesses have fallen prey to predatory energy brokers, and Britain’s creaking electricity grids face decade-long queues of renewable energy projects waiting to connect to the power system.

Britain’s power grids, which are regulated by Ofgem, have warned renewable energy developers to expect a 10-to-15-year wait to connect their projects to the network. The delays threaten the government’s clean energy targets and put much-needed investment in the UK at risk. Critics of the regulator blame its failure to keep pace with seismic changes to the industry.

“As a regulator, without a doubt, we’ve had a whole lot more to do, and a market that was very different from the one we envisaged in 2020,” Brearley says. “But now, as the market stabilises, we need to think hard – with the industry – about what is the right market for the future.”Ofgem has already set out proposals to protect small businesses and speed up grid connections. It is also investigating British Gas for its role in forcing vulnerable households on to prepayment meters.

But getting ahead of the industry’s scandals before they can emerge requires a careful balancing act between bringing companies to heel and stifling the innovation the industry sorely needs. “Ofgem is far more interventionist today than it was five years ago,” Brearley says. “All we’re pointing out is that there are trade-offs involved. The trick is to get the balance right.”

The Guardian

Water firm pours cash on overseas investors

One of Britain’s biggest water companies has showered overseas investors with more than £150 million in dividends despite the outcry over the dumping of sewage in bathing waters.

Shareholders in Northumbrian Water’s parent company also handed its boss, Heidi Mottram, a 65 per cent bonus increase. Her bonus was £215,000, up from £130,000 last year, as part of pay totalling £781,000.

The bonus was driven by the chief executive meeting adjusted profit targets and “group distributions” — thought to be dividend payouts. She also hit company targets for “pollution incidents”, but not those for “discharge compliance”.

Northumbrian’s owners — an investment firm controlled by Hong Kong billionaire Sir Li Ka-shing, and American private equity giant KKR — have shared dividends totalling £159 million since March 2022, according to corporate filings. This was despite Northumbrian sinking to a £50 million pre-tax loss.

The company’s finances were boosted by a £22 million rebate from HM Revenue & Customs. The rebate, at taxpayers’ expense, is in part because interest payments on Northumbrian’s debt cancels out taxable profits. The parent company’s net debt was £3.5 billion in March, up from £2.8 billion at the end of the previous year.

The figures sparked a strong rebuke from campaigners demanding that water companies clean up their act. Feargal Sharkey, the former Undertones singer who is now a water campaigner, said: “The further financial travesty that is the water industry continues to unravel. First it was Thames Water … now it is Northumbrian. All of this is exposing customers to even more debt and an increase in prices simply to compensate for corporate greed and regulatory incompetence.”

Northumbrian supplies water and sewerage services to almost 4.4 million people in the northeast of England and Essex and Suffolk.

Campaign group Surfers Against Sewage published figures indicating that there were 963 hours of discharges into bathing waters across the Northumbrian Water area in 2022. The company responded by insisting it had the “lowest level of pollution” in the country.

It was also one of six water firms named in a legal class action alleging that they failed to properly report the dumping of sewage and pollution of rivers and seas to authorities, the Guardian reported last week. And it was one of the six worst-performing companies according to an assessment by industry regulator Ofwat at the end of last year.

The company said in its corporate filings that Mottram’s bonuses had been paid by its parent Northumbrian Water Group Limited, and “not by NWL [Northumbrian Water Limited] customers”.

The Times

Victorian sewers not to blame for England’s pollution, research shows

Less than 12 per cent of the sewage network in England and Wales was built in the 19th century, undermining water industry claims that outflows of raw effluent and storm water are a result of antiquated Victorian infrastructure.

The majority of the network was instead built in the years before privatisation, with approximately a fifth constructed during the 1960s and 1970s, according to data analysed by consultancy Arup and campaigners Windrush Against Sewage Pollution.

Professor Peter Hammond, data researcher for Wasp and former professor of computational biology at University College London, said the findings debunked the argument from water companies and government that sewage outflows could be blamed on the Victorian waste water networks.

“Victorian sewers constitute a minor proportion of the sewer network and cannot be blamed for the toxic mix of untreated human waste and road surface run-off polluting our inland and coastal waters,” said Hammond, who has appeared at several parliamentary hearings on water.

“The disparity of infrastructure investment before and since privatisation must surely bear the brunt of blame,” he added.

The analysis contradicts the argument often made by the water industry and government that the privatised water companies are releasing raw sewage into coastal waters and rivers partly as a result of having inherited infrastructure that was built in the Victorian era, which ended in 1901.

As recently as April Thérèse Coffey, the secretary of state for environment, food and rural affairs, said: “Sewage overflows stem from our principally Victorian infrastructure”.

In July 2023 Water UK, the trade association, said: “The industry is strongly committed to accelerating the pace of improvement, including with a £10bn overhaul of our Victorian sewage system to transform our rivers and seas.”

However, Hammond’s analysis found no evidence to suggest that Victorian sewer networks were more likely to be involved in spills of untreated sewage. “More likely it is the lack of maintenance and investment,” he said.

Financial Times analysis of data from Ofwat, the regulator, has found that investment in sewage infrastructure has fallen while the population has grown. Spending on wastewater infrastructure — including pipes — has fallen in real terms from an annual average of £3bn in the 1990s to £2.7bn in the 2020s so far, despite a 16 per cent increase in the population in the past two decades.

The result is a sewerage system that is often overwhelmed, causing raw effluent to be discharged through the network’s 16,563 combined sewer overflow pipes, which are designed to be used only during periods of heavy rain.

Dieter Helm, a professor of economics at Oxford university, said water companies, regulators and politicians “should stop blaming the problem on what the Victorians did a century and a half ago”.

“The data shows there has been inadequate capital maintenance and companies have not been kept up to the mark,” he said. “What we need now is a new Victorian mindset — and to urgently get on with investment now.”

After being privatised without debt in 1989, and given a £1.5bn government handout to make improvements to the network, water companies had ramped up £60bn in borrowing by March 2022 and paid out more than £70bn in dividends while presiding over leakage and pollution failures, including unknown quantities of untreated sewage pouring into coastal waters and rivers.

Beaches and rivers have been closed to swimming for several days this summer, while last week at least 57 people fell ill with diarrhoea and vomiting after a World Triathlon Championship Series event off Roker Beach in Sunderland. The UK Health Security Agency has confirmed that it is investigating whether sewage was to blame.

Water UK said: “England has 100,000 kilometres of older ‘combined’ sewers with more than 15,000 storm overflows. A large proportion of this combined sewer goes back to the Victorian era. Companies have acknowledged that they haven’t done enough to upgrade this part of the network but are proposing to spend more than £10bn to put it right.”

Defra said: “We are clear that water companies must deliver more and better for the environment and their customers.”

Ofwat declined to comment.

Financial Times

Octopus and Good Energy defend heat pumps amid backlash to oil boiler ban

Energy suppliers have given heat pumps a fresh vote of confidence despite calls from backbench Conservative MPs to slow down the shift from heating systems powered by fossil fuels.

The government has been consulting on oil-powered boilers, which heat 1.7m homes across the UK, and is considering beginning a phase out of new sales from 2026.

New installations of gas boilers are also potentially set to be banned in all homes by 2035 as part of the push to net zero carbon emissions. Clementine Cowton, director of external affairs at Octopus Energy told City A.M. that oil boilers were “expensive and inconvenient,” which meant they were “only installed in homes that can’t connect to the gas grid.”

She said: “Heat pumps are suitable for all types of homes and are simply a better, cleaner and more efficient form of heating than both gas and oil. With prices coming down all the time, we believe people will willingly choose to replace their boilers with a heat pump when the time comes.”

Heat pumps are large refrigerant units which extract energy from the air which is turned into zero carbon heating.

A recent government study determined that any style of home could utilise the device, despite claims from companies such as Bosch earlier this year they did not function effectively in older homes.

Octopus is currently offering heat pumps at an installation price of £2,500 for customers using the £5,000 grants offered in the Boiler Upgrade Scheme, bringing them in line with fossil fuel alternatives – with British Gas owner Centrica also offering £3,000 units.

The government is targeting 600,000 new low-carbon heat pumps on an annual basis within five years, however the latest figures covering the period from May 2022 to July 2023 revealed only 21,438 applications were made for discount vouchers.

By contrast, over 20m heat pumps have been installed across Europe.There are now fresh media reports the government is considering amending its mooted oil boiler ban, so that households will be allowed to new oil boilers as long as they run on greener fuels.

This follows a proposed amendment to the Energy Bill from former environment secretary George Eustice calling for boiler upgrade subsidies to be applied to hydrotreated vegetable oil, which can be used as a replacement fuel in boilers that have minor adaptations.

Nigel Pocklington, chief executive of challenger supplier Good Energy, warned the government should avoid engaging in “bad science” and “bad business.” This was particularly damaging in the context of vast subsidy packages for green upgrades in the EU and US, compared to the UK that was “peddling backwards.”

He revealed a third of the new heat pump installations overseen by his company since it snapped up Igloo Works last year were transitions from oil boilers – and instead called for the Boiler Upgrade Scheme to be more consumer friendly.

“It’s a generous incentive and is beginning to get the cost of an install down to parity with a new boiler setup. But it’s obviously poorly understood, quite bureaucratic to apply for and not being taken up in great numbers,” he said, speaking to City A.M.

City A.M

UK uses inflated carbon price to shape energy policy, analysts say

The UK government is using a carbon price more than three times higher than its current price to help shape energy policy over the next two years, raising questions over its strategy to weaken the cost of pollution.

A paper published by the Department of Energy Security and Net Zero last week argued new wind and solar projects will be substantially cheaper than new gas-fired generation from 2025, using a carbon price of near £150 per tonne to underpin its analysis.

But the UK carbon price is currently about £40 a tonne, far below the price for its European Union counterpart, having fallen sharply after the government last month released more carbon allowances and eased reduction targets for polluters.

The higher pricing assumption in the document and the changes to the UK’s market for trading emissions have raised questions in the energy industry, which believes Westminster is sending mixed messages while asking them to invest billions of pounds in green projects.

Carbon pricing has led to the almost complete phasing out of coal in the UK energy mix, by making it more expensive relative to cleaner fuels or renewables.

Under the UK Emissions Trading Scheme (UK ETS), electricity generators and heavily polluting industries must pay for every tonne of CO₂ they emit over and above allowances handed to them by the government.

“Electricity generation costs are a fundamental part of energy market analysis, and a good understanding of these costs is important when analysing and designing policy to make progress towards net zero,” Desnz said in its paper, adding that they had raised their carbon price assumptions “significantly” compared with their last report in 2020.

The authors acknowledged this would result in fossil fuel generation appearing to become more expensive.

Desnz, which is run by energy minister Grant Shapps, said that the carbon price assumptions underpinning its analysis were not “publicly available” adding that sharing them would “prejudice commercial interests and cause market interference”.

But the paper included a carbon cost for each megawatt of electricity generated in new gas-fired plants built in 2025 or 2030, allowing energy specialists to calculate the apparent assumptions the report’s authors were using.

The analysts said it appeared the government had effectively ignored the recent fall in carbon prices and had instead “drawn a straight line” from the UK ETS’s all-time high of just under £100 a tonne last August to reach the near £150 assumption in 2025.

They also questioned whether the pricing was evidence of a split within the department over the government’s intervention to weaken the carbon price, which has reduced the cost of emissions.

A spokesperson for Desnz, when shown the analyst calculations, said the numbers they had used were “illustrative assumptions and not government projections”. They described the analysts’ calculations as “based on crude and simplified assumptions” adding that the department’s own figures were “illustrative assumptions and not government projections”.

The government’s move to offer the market more permits to pollute pushed the UK carbon price to a 45 per cent discount to the EU emissions trading scheme.

Environmentalists and the energy industry in the UK criticised the move, with industry body Energy UK calling it “pennywise and pound-foolish”, and suggested it would likely increase the long-term cost of electricity if it derailed investments in renewables.

Financial Times

Prospectors hit the gas in the hunt for ‘white hydrogen’

For more than a decade, the village of Bourakébougou in western Mali has been powered by a clean energy phenomenon that may soon sweep the globe.

The story begins with a cigarette. In 1987, a failed attempt to drill for water released a stream of odourless gas that one unlucky smoker discovered to be highly flammable. The well was quickly plugged and forgotten. But almost 20 years later, drillers on the hunt for fossil fuels confirmed the accidental discovery: hundreds of feet below the arid earth of west Africa lies an abundance of naturally occurring, or “white”, hydrogen.

Today, it is used to generate green electricity for Bourakébougou’s homes and shops. But geologists believe that untapped reservoirs of white hydrogen in the US, Australia and parts of Europe have the potential to provide the world with clean energy on a far greater scale.

This would have major implications for the climate. Hydrogen has emerged as a tool in the race to curb carbon emissions. The clean-burning gas can replace fossil fuels in factories, power stations and homes with zero greenhouse emissions.

The catch? Typically, hydrogen is made from fossil fuels in a process that creates carbon emissions (so-called “blue” hydrogen), or by using renewable electricity and water (green hydrogen), which is very expensive. The discovery of natural sources solves both problems.

The size of the prize could be enormous: the US Geological Survey has said that even if only a small fraction of hydrogen under the Earth’s surface could be recovered, there would probably be enough to last for hundreds of years.

During the Covid pandemic, Luke Titus, founder of Gold Hydrogen, uncovered a historical hydrogen discovery in South Australia. Titus was reviewing old documents from the Geological Survey of South Australia which included an analysis of data from local farmers who searched for oil using divining rods.

One borehole drilled in 1921 on Kangaroo Island produced as much as 80% hydrogen. Another, on the nearby Yorke peninsula, was close to 70%. A century later, Gold Hydrogen began to explore the region and plans to begin drilling in October.

The company is one of dozens of hydrogen startups which hope that Bourakébougou could be this century’s Oil Creek, Pennsylvania – the site where the first commercial oil rig, in 1859, ignited an industry that would radically alter the course of human progress.

The burgeoning hydrogen industry’s supporters include Bill Gates. The billionaire investor, through his company Breakthrough Energy, was reportedly one of five backers to pour about $90m into Koloma, a company based in Colorado which is hunting natural hydrogen along the US’s Midcontinental Rift System.

The 1,200-mile tectonic fault running through North America is also being targeted by Natural Hydrogen Energy, a startup due to begin exploration work alongside Australia’s HyTerra in Kansas later this month.

In Europe, which remains gripped by a gas supply crisis as a result of of Russia’s invasion of Ukraine, white hydrogen has been discovered in France, in the Lorraine mining basin. And a British company, Getech, is adapting software developed to find oil to locate hydrogen deposits.

The true potential of white hydrogen will depend on the findings from these early projects, says Philip Ball, a research fellow at Keele University and a geoscientist in the field.

“We’re on the cusp of a new understanding but whether this translates into a serious new energy source is a very big question,” Ball says. “Many geologists don’t understand this field. There’s a feeling of ‘well, if hydrogen was there, wouldn’t major oil companies have found it already’? But they weren’t looking for it. Most hydrogen discoveries have been by accident.”

There remains uncertainty over the way hydrogen forms deep within the Earth, exactly how it migrates to the surface, and how best to extract it. The answers will be crucial in understanding what white hydrogen would cost to produce. Estimates suggest it would be cheaper than hydrogen from fossil fuels or water – but there are many caveats.

Oil companies including Total and Engie in France, and Repsol in Spain, have taken modest steps on white hydrogen. There is limited interest from the industry’s largest players, but the results from the pioneer hydrogen hunters could change that. If white hydrogen can live up to the hype, the oil majors could enter the market, as they followed the early shale gas “wildcatters” into fracking. This time, the results could be a bonus for the climate too.

The Observer

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.