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In our latest round-up of national media coverage Ovo Energy was considered by Ofgem to be at risk of failure earlier this summer, prompting the regulator to prepare for its potential nationalisation.
Meanwhile, Energy UK has said the government’s revenue cap on low carbon electricity generators will have “catastrophic consequences” for investment in green technologies.
Ovo Energy was on regulator’s watchlist for nationalisation
Ovo Energy, the UK supplier that has launched a last-minute bid to acquire collapsed rival Bulb from the government, was considered at risk of failure itself this summer, prompting regulator Ofgem to prepare for its potential nationalisation.
Plans were drawn up in July, according to two people close to Ofgem, with the company deemed financially vulnerable but “too big to fail” as a supplier to 4.5mn gas and electricity customers, or almost a sixth of all UK households.
Putting the company under state control would have been politically awkward for both the government and Ofgem following the collapse of dozens of suppliers last year.
Ofgem estimated that nationalising Ovo could have cost taxpayers and potentially bill payers £4bn, according to the people close to the regulator.
Fearing that a number of energy retailers were still at risk of collapse, Ofgem chose instead to provide additional support to the sector, introducing measures that increased charges for the typical household by roughly £400 a year — a move that stoked dispute within the regulator given that households were already being battered by spiralling energy costs.
“This deal has moral hazard written all over it,” said one person close to the regulator. “Suppliers should be able to ride out hard times, but Ofgem has introduced measures to protect them and consumers are paying the price.”
The £400 in additional charges, based on internal Ofgem estimates seen by the Financial Times, are for measures including a market stabilisation mechanism and one that shields suppliers from mismatches in the price of near-term power and gas and prices in the futures markets.
But when government support for energy bills — which limit costs for the typical home to £2,500 a year — ends in April the average household could face annual bills of more than £4,000, based on industry forecasts for the price cap.
In its 2021 accounts released last month, Ovo flagged that there was “significant doubt” over the “group’s and company’s ability to continue as a going concern”.
However, the company said in September that this was no longer the case because recent interventions by the government and the regulator had improved certainty. Ovo said on Friday that it was in “good financial health” and had “never been at risk of administration” in response to questions about the regulator’s nationalisation plan.
Ovo’s eleventh-hour bid for Bulb, which could bring it 1.4mn new customers, is likely to face enhanced scrutiny given its warning in last year’s accounts.
Executives at rival suppliers have told the FT that they were amazed by the emergence of Ovo’s bid for Bulb. It is unclear whether the government could accept a bid from Ovo since the sales process is already closed.
Details of Ovo’s bid have not been revealed but Octopus Energy, the only other company to table an offer, has asked the government to lock in Bulb’s fuel purchases at a cost of about £1bn, although Octopus has said it will eventually repay this.
If Ovo is successful in acquiring Bulb it will provide energy to about a fifth of all UK households, rivalling British Gas as the largest supplier.
Ofgem declined to comment directly on the plan to nationalise Ovo or its decision to have customers fund additional support for the sector.
But the regulator said in a statement that it would “always plan for scenarios that will ultimately protect consumers, including the introduction of short-term interventions to help the market and benefit customers in avoiding higher costs from any future supplier failure”.
Financial Times
Lord Hollick, chairman of an official committee investigating Britain’s water industry, this weekend slammed executives and regulators for failing to prevent the discharge of millions of tons of raw sewage into rivers – and said it could cost at least £150billion to tackle the problem.
The Labour peer, a former owner of Express Newspapers, spoke of his ‘dismay’ over evidence presented to the Lords Industry and Regulators Committee on the appalling state of water infrastructure, following decades of under-investment. There were 375,000 untreated sewage leaks into rivers in 2021 alone, according to the most recent figures.
Hollick said that the state of Britain’s sewage and water systems was a ‘very serious issue’ that was going to take ‘a great deal of funding and investment to put right’. He added that the lowest figure he had so far heard for the investment needed tackle the sewage problem was £150billion.
Ending leaks could add £100billion to the bill, he said. Other estimates for the upgrades needed have ranged up to £600billion.
The money would probably come from the water companies, along with significant sums from taxpayers and higher bills for customers.
Sir James Bevan, chief executive of the Environment Agency, told the committee he had not been aware of the scale of the problem until the monitoring of water quality was stepped up over the past two years.
Hollick said: ‘It is a surprise neither the Government nor the two regulators took action some time ago. It’s an industry-wide failure which has now got to be put right.’
He added that the public had helped reveal the extent of the pollution and leaks, saying: ‘MPs have been hearing for a long time from constituents that they can’t swim in the river or the sea. We’re going to be very interested to hear from Environment Secretary Ranil Jayawardena as to why the Government hasn’t been more decisive and insistent sorting this out.’
This Is Money
De facto UK windfall tax on green energy is ‘catastrophic’, sector warns
The UK government’s de facto windfall tax on low carbon electricity companies will have “catastrophic consequences” for investment in green technologies such as wind and solar, energy companies have warned.
Energy UK, a trade body that represents companies including Centrica, EDF Energy, ScottishPower and SSE, this weekend joined criticism of the government’s revenue cap on low carbon electricity generators, which was confirmed by Liz Truss’s government before she stepped down as prime minister.
Energy companies have branded the policy an effective windfall tax and are concerned it is even more punitive than a separate levy on oil and gas producers, which was introduced by former chancellor Rishi Sunak in May.
Energy UK has sent a briefing to all MPs ahead of chancellor Jeremy Hunt’s fiscal statement — expected on October 31 — warning that the cap, as it is currently designed, would “cement a tax regime heavily tipped in favour of oil and gas, and send a disastrous message [to global investors] about the UK’s climate commitment”.
The group argues that while the levy on oil and gas — which raised fossil fuel producers’ headline tax rate from 40 to 65 per cent — is charged only on profits, the cap will limit its members’ profit opportunities, which is potentially even more damaging.
The group also points out that Sunak’s so-called energy profits levy on fossil fuel producers was accompanied by a generous investment allowance that companies can use to reduce their tax bill if they embark on new drilling operations.
The oil and gas levy includes a sunset clause that would remove it at the end of 2025, whereas the energy prices bill would hand ministers the power to keep the revenue cap in place two years longer, until the end of 2027, Energy UK warns.
Unless similar allowances are built into the revenue cap, the government will “penalise investment in clean, cheap, low-carbon generation in favour of polluting oil and gas extraction”, the briefing says.
A “poorly designed” revenue cap would be “an unprecedented policy that could have catastrophic consequences for the investment needed to safeguard both our climate targets and energy security both this winter and beyond”, the briefing adds.
Energy companies are hoping a new Conservative prime minister will pause some of Truss’s initiatives and work with the sector to design better solutions to the energy price crisis.
A spokesperson for the government said: “We are taking action to temporarily decouple gas and electricity prices and set a fair price for low carbon electricity generation and will shortly be running a consultation on the Cost-Plus Revenue Limit to ensure that interested parties can have their say on its design.”
“The Energy Prices Bill comes alongside longer-term measures in place to reform the energy market, giving Britain back control of its own homegrown energy and breaking ties to the ever-increasing volatility and uncertainty of the global gas market.”
Financial Times
National Grid not fit for purpose, Octopus Energy boss Greg Jackson claims
The boss of one of Britain’s biggest energy suppliers has claimed that National Grid is “not fit for purpose” and was the biggest challenge to building more renewable energy sources.
Greg Jackson, chief executive of Octopus Energy, which supplies three million homes and businesses, argued that while it can take less than a year to do the engineering work for a wind farm it could then take six or seven years to get permission to connect to the National Grid.
In comments to the Times Earth Business Summit yesterday, Jackson said the grid system was originally designed to ship energy from a small number of coal plants to population centres. Now the energy supply network is increasingly decentralised, with a growing number of wind and solar farms producing renewable power sources across the country.
This year it was reported that National Grid, which used to receive 40-50 applicants a year but now fields about 400 applicants annually.
Jackson told delegates that the UK could follow the example of other countries, such as India and Brazil, which operate “contestible grids” where connections to the national grid do not have to be established by the grid operators but can be fielded out to accredited contractors.
National Grid said: “National Grid has to operate within a planning and regulatory framework which prevents investment in anticipation of generators requesting a connection to the grid. This needs urgent reform to allow faster connections to the grid. We’re working with the government and regulator to push this forward at pace.”
The Times
Water watchdog Ofwat slammed for £500,000 staff bonuses amid sewage pollution
Under-fire water watchdog Ofwat has been blasted for splashing out on a staff bonus bonanza.
New figures show £509,832 was paid out in the last five years despite anger at Ofwat for failing to hold the water industry to account over leaks and sewage pollution.
On Tuesday a House of Lords committee will grill its bosses on “poor performance”.
And they will be asked whether Ofwat has held water companies to their statutory obligations on sewage discharge.
Over the last year, 106 Ofwat staff pocketed bonuses. Some were given £50 vouchers, while others picked up payments averaging £1,800.
The House of Lords’ inquiry comes after it emerged water firms are raking in huge profits despite a water crisis and hosepipe bans.
They made £2.8billion in combined operating profits last year, which campaigners say should go to cleaning up rivers in which they dump raw sewage.
Firms were responsible for more than 400,000 sewage dumping events in 2020 alone, according to the Environment Agency.
CEOs pocket huge salaries, with £16.8billion in dividends paid to shareholders over 11 years.
Birmingham-based Ofwat has around 250 staff. Boss David Black earns £150,000.
The Commons Environmental Audit Committee has asked if Ofwat could limit executive bonuses at polluting firms.
Ofwat says it has improved performance on leakage and will act fast if firms break agreements on sewage. Staff got a sub-inflation 2% rise this year.
The Mirror
More than two million UK households are in debt on their electricity bills
The number of UK households in arrears on their energy bills soared to record levels in the second quarter of this year, with more than two million behind on their electricity payments.
Data from the energy regulator Ofgem shows that at the end of June, 2,347,511 households were behind on their electricity bills and 1,858,585 on their gas bills. Both totals rose by about a quarter in just three months, and by almost two-thirds since the end of 2020.
The news comes days after Jeremy Hunt, the chancellor, announced that the cap on energy unit costs would last only six months instead of the planned two years. Hunt said a targeted scheme would replace it from April, but provided few details.
Peter Smith, director of policy and advocacy at National Energy Action, said: “With over two million households already in arrears with their energy bills, it is deeply worrying but not unsurprising. Bills have almost doubled in a year, and we haven’t yet seen the full impact of the latest price increase.
“We’re also now approaching winter and as temperatures drop many people are afraid to turn the heating on or even keep the lights on. It’s going to be a bleak and cold winter for the most vulnerable and unless the new prime minister acts urgently we would expect the number of households in arrears to increase yet again next year.”
Morgan Wild, head of policy at Citizens Advice, said: “Our advisers have seen people resorting to unplugging fridges and freezers, washing clothes by hand and skipping meals to cut back on their energy costs because they simply can’t afford to keep the lights on.”
Last month Citizens Advice saw a record number of people who could not afford to top up their prepayment meter – the eighth time this record has been broken in the last nine months.
“Even with the temporary bill freeze in place, the cost of energy will still be at a record high,” said Wild. “This crisis isn’t going away. By the end of September, we’d already helped more people with energy issues than we did for the whole of last year with an unprecedented amount who just can’t afford to top up their prepayment meter. The government must think carefully before it acts so we don’t see even higher numbers at crisis point in April.”
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.
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