Weekend press round-up: Power firms U-turn over windfall tax

Our latest round-up of stories from the Bank Holiday weekend includes reports that energy generators believe a windfall tax may be a better option for tackling their excess profits, with fears other proposals could be more damaging to them.

Meanwhile further details have emerged of the government’s support package for businesses and there are reports some customers have been prevented from switching to large suppliers.

Power firms U-turn over windfall tax

Some of Britain’s biggest electricity generators believe they should be subjected to a windfall tax rather than being pushed into signing cut-price power supply contracts this winter.

The idea of a one-off levy is gaining popularity amid fears that other proposals for tackling excess profits may be too complex to implement at short notice and could be even more damaging, according to industry executives.

Rising gas prices have inflated wholesale electricity prices, pushing up energy bills and resulting in windfall profits for some companies.

Liz Truss has pledged that the government will subsidise a freeze on energy bills for households and businesses, with details of the business support package expected this week. She has so far ruled out a windfall tax.

Truss wants to reduce wholesale power costs by getting generators to sign long-term contracts to supply electricity below high market rates. The industry has backed the idea of companies entering into such contracts voluntarily. Ministers are understood to have held talks with companies including Orsted, RWE, SSE, ScottishPower, Drax, Vattenfall, EDF and Octopus.

People familiar with the talks say some executives have been alarmed by ministers pushing to introduce such contracts before winter and fear this could inflict huge losses on those that have already hedged some of their power output for coming months below market prices.

Senior executives at several power generation groups, speaking on condition of anonymity, told The Times that while they did not want a windfall tax, they now believed it may be the best option for this winter, since it would only target actual profits.

One said they would back a windfall tax if it was “implemented in a fair way and doesn’t stifle investment — so you get allowances if you’re going to continue to invest”. Another senior executive said: “I don’t think anybody thinks that anything other than a windfall tax is the best way forward.”

It marks an extraordinary change of tune after a furious industry backlash when a windfall tax was first mooted by Rishi Sunak in May. The former chancellor considered including power companies within his “energy profits levy” on North Sea oil and gas producers, which increased the tax rate and offered tax breaks for investment.

Several big generators and lobby groups have backed voluntary contracts. However, they are now concerned about how this will be implemented. An industry source said: “Some of the generators have been saying, ‘Why don’t we just do a windfall tax? It’s going to be time-limited, there’s going to be a nice reinvestment clause as per the oil and gas one’. I think that would probably be the preference.”

The proposed long-term contracts assume companies sell their power at short notice in the market, and require them to pay back the difference between the market price and the agreed price to consumers.

Hedging is a financial strategy used to limit risks and some companies have already hedged much of their expected output at prices well below market rates. If they are now forced into new government contracts, they would have to buy back their hedged positions, incurring huge losses.

Adam Berman, deputy director for policy at Energy UK, said it was “concerned that the government is looking to implement this before hedges have expired, which could cause significant adverse consequences for generators”.

A government source said that “generators’ hedging arrangements will be considered when exploring options”.

The Times

UK Plans to Cut Business Energy Rates in Half in Bailout Package

The British government is developing a plan that may halve energy rates for many businesses to put them more in line with what households are paying, according to people familiar with the matter, as the new administration tries to stem the economic damage from soaring costs.

The bailout would discount the wholesale price that’s incorporated into business energy contracts by fixing it to roughly the same amount charged to households, the people said, asking not to be identified because the discussions aren’t public. That’s about a 50% discount for businesses who’ve recently fixed their contracts.

The efforts are part of a £40 billion ($46 billion) support package being finalized by Prime Minister Liz Truss in response to an energy crisis that’s pushed up the cost of running factories and keeping the lights on in shops across the UK. Small businesses are taking drastic steps to contain costs as some energy bills rise by as much as 10 times.

The Department for Business, Energy and Industrial Strategy said it wasn’t immediately able to comment.

The discount, which is slated to last six months from October and could be extended, won’t be straightforward to execute. The specific amount will depend on what the wholesale price was when a business signed its energy contract, and the government will publish the discounts suppliers need to apply when they send bills to customers, the people said.

Suppliers will get rebates for those discounts, which would apply to contracts already signed earlier this year. The potential price cuts wouldn’t apply to the other fees charged by brokers and suppliers, allowing for more competition in the marketplace.

Bloomberg

Southern Water sewage dumps show scale of clean-up job for Australian owner

The putrid brown seawater that prevented people swimming at stretches of popular English beaches on some of the hottest days on record this summer was the result of a sharp increase in failures at Southern Water’s sewage pumping stations — and a sign of the scale of the task facing its owner, Macquarie.

A year after the Australian asset manager took over the regional water monopoly in an emergency £1bn refinancing, Southern is facing a torrent of maintenance problems.

More than half of the pollution incidents in its network — which includes popular tourist destinations Herne Bay, Whitstable and Brighton — were due to a rise in breakdowns at pumping stations, while ageing infrastructure means operational failures are happening with increased “frequency and severity” across the network, according to corporate filings seen by the Financial Times.

Southern also sparked anger among some of its 4.2mn customers across Kent, Sussex, and Hampshire when it became the first water company to impose a hose pipe ban in August. Most of its main trunk lines are more than 100 years old, causing a fifth of treated water to be lost in leakage.

The £1bn of equity Macquarie injected into the business in September 2021 prevented Southern collapsing after its previous owners, a consortium led by JPMorgan, warned it risked defaulting on loans.

Just £230mn of that was used to improve Southern’s operations, according to a consultation by regulator Ofwat into the ownership transfer that finished last week. The rest has been used to reduce loans between the complex array of holding companies used by its former owners, which retain a 38 per cent stake.

Separate corporate filings seen by the FT warn that Southern’s “risk profile has deteriorated over the year” and the “company continues to be at risk of a credit rating downgrade as a result of poor operational performance”.

The company’s net debt has risen from £5bn to £6bn over the past year, which Macquarie said was due to rising inflation rather than new borrowings. Already at least one-fifth of the typical £400 per year household bill goes to paying interest rather than infrastructure improvements and services.

Meanwhile the number of pollution alerts this summer from Surfers Against Sewage, which uses real-time information from monitors on key outflow pipes to warn swimmers of health risks, suggests sewage dumps are far more common than the Environment Agency data indicates.

There are now fears this will be repeated at Southern.

The Australian asset manager said the capital it was providing would “enable Southern Water to invest significantly to upgrade its network with £2bn to be invested over the next four years of the current regulatory period to fix the pipes, pumping stations and sewers, which are underperforming and causing harm to the local environment”.

It has also pledged to simplify Southern’s corporate structure, including the replacement of Cayman Islands-registered financing companies, which it said would take place next week.

Ofwat remains optimistic that the situation at Southern will improve. The regulator said it had made clear that “very profound changes are required and much overdue to improve and strengthen” Southern’s performance given its role as a provider of an essential public service.

Martin Bradley, head of Macquarie Asset Management’s European real assets team, insisted a turnround programme was already “showing early signs of operational improvement”.

This includes a 50 per cent increase in capital investment, to £632mn in the year to March 2022, to halve pollution incidents as defined by the EA compared with last year.

Macquarie is also investing in 30,000 monitors across the network “as part of a long-term transformation that will see Southern Water become more sustainable and resilient,” said Bradley.

But it is still unclear how Macquarie can address a decades-long backlog of work at a time when the cost of living crisis is making it harder to raise bills and the risk of non-payment is increasing, especially as water companies are prevented by law from turning off supplies.

“Interest rates were exceptionally low over the past decade and that would have been an ideal time to finance large investment programmes,” said Colm Gibson, head of Berkeley Research Group’s regulatory practice. “With rates rising, it will be harder now.”

Macquarie is best known for its decade-long ownership of England’s largest water and waste group, Thames Water, which it sold in 2017. The company has been criticised for increasing Thames’s debt, taking out dividends and paying little in corporation tax — while presiding over leakage and pollution failures. Macquarie has stressed that £12bn was invested in the network over the period.

Since 2005, the Australian asset manager has bought more than £50bn of infrastructure assets in the UK, many of them former state-owned monopolies that benefit from a steady government-backed income stream. These have included Cadent Gas, the largest gas distribution network in the UK, a stake in National Grid’s gas transmission business and South East Water.

Ofwat noted in the consultation on the Southern takeover that Thames had “performed poorly across a number of metrics and concerns were raised about the business’s financial management”.

Financial Times

Big five UK energy companies turning away new customers

Householders in Britain who want to sign up to a new energy company are apparently being obstructed by the largest suppliers, in potential breach of their licence obligations.

The “big five” energy companies are informing those who apply online for a tariff that they should remain with their current supplier because of the volatile energy market. According to the industry regulator, Ofgem, suppliers are obliged to accept new customers as a condition of their licence.

The issue emerged after some consumers reported being unable to find another supplier who would take them on. Some said that when they applied for a quote, a message said they should remain with their current supplier and that the company was not providing quotes.

In July, Ofgem launched a long-planned “switching programme” to make it easier and faster for customers to switch supplier. The aim is to strengthen competition in the energy sector by encouraging customers to shop around.

However, soaring energy prices have ended competitive fixed-price contracts, with the mandated Ofgem price cap usually the best tariff available. That annual figure for the typical household had been due to soar to £3,549 from 1 October, before Liz Truss announced earlier this month that it would be reduced to £2,500 for the next couple of winters.

Many price comparison websites no longer offer quotes to allow consumers to identify the best deals. The Guardian attempted to obtain tariffs from British Gas, E.ON, EDF, ScottishPower and Ovo Energy. All five websites stated that they were not currently providing online quotes and claimed that customers were better off remaining with their current supplier.

British Gas confirmed via web chat that it was not currently accepting new customers because Ofgem advised against switching while prices remain volatile.

EDF and ScottishPower told the Guardian they would accept new customers on a standard variable rate by telephone, an option not mentioned on their websites. However, EDF’s contacts page told customers only to use its busy phone lines in an emergency, and ScottishPower referred people back to the website due to high call volumes.

An E.ON spokesperson said: “With energy prices at a record high, it is recommended that customers stay with their existing supplier. However, customers can sign up to receive an alert as soon as we are in a position to offer competitive fixed-price tariffs for new customers, or can call us to discuss their tariff.”British Gas and Ovo did not respond to requests for a comment.

Ofgem denied British Gas’s claim that it had advised customers to avoid switching. “In fact, suppliers must take on new customers when approached by them,” a spokesperson said.

The regulator declined to confirm whether it was aware of suppliers blocking new customers, but said it investigated companies that it believed may have breached one or more conditions of their licences.

After the Guardian submitted evidence of its findings, it added: “We hold suppliers to account on [accepting new customers] by using all forms of intelligence shared with us.”

Some companies, such as Octopus Energy, have been allowing new customers to sign up. Although the firm also declines requests for online quotes and advises customers to stick with their existing supplier, it does in the small print provide a number for those who still require a quote.

The Guardian

Falling gas prices may slash projected cost of energy bailout drawn up by Prime Minister Liz Truss, according to City experts

Falling gas prices may slash the projected cost of an energy bailout drawn up by Prime Minister Liz Truss, according to City experts.

Dramatic new forecasts by investment bank Goldman Sachs could wipe tens of billions off the Treasury’s bill, they said.

The revised estimates have been described as ‘more realistic’ than previous sky-high forecasts and a ‘game-changer’ by one prominent Truss adviser. Analysts had warned promises to freeze household bills and support business would leave taxpayers on the hook for more than £150billion, previous estimates suggested. That would add to the nation’s huge £2.4trillion debt pile and heap more pressure on the Bank of England to increase rates to curb inflation.

The report by Goldman Sachs predicts the price of gas – which soared in the wake of Russia’s invasion of Ukraine – was likely to more than halve to €100 (£88) per megawatt-hour by next spring. Goldman said efforts by European countries to wean themselves off Russian gas and avoid big power shortages this winter by increasing their own supplies were likely to prove effective.

Based on the bank’s estimates, the annual cost to the taxpayer would be just £30billion by next year and ‘largely disappear’ by 2024/25, according to Doug McWilliams of the Centre for Economic and Business Research.

Gerard Lyons, chief economic strategist at online wealth manager NetWealth and a close ally of Truss, said: ‘While it is hard to be precise about the exact cost, this appears more realistic.’ He said gas prices have ‘fallen sharply’ since the plan emerged and commentators issued their dire predictions about the cost to the taxpayer.

Lyons said: ‘The financial markets were willing to believe the extreme projections that were based on astronomically high gas prices being sustained.

‘It has [since] become clear that European countries, including the UK, are taking action to address their energy supply needs.’

More details are expected in what has been described as a ‘mini-Budget’ to be unveiled by the Government on Friday. A Whitehall source said Government officials are encouraged by the Goldman Sachs analysis.

The price of gas is volatile, particularly so since the invasion of Ukraine. According to the Office for National Statistics, it fell by almost a third in the week to September 11. That is still twice as high as a year ago.

It comes as the Bank of England prepares to announce on Thursday what is expected to be a record rise in interest rates, currently at 1.75 per cent. Financial markets are predicting a 0.75 percentage-point rate hike, to 2.5 per cent.

At that level, someone on a 25- year, £200,000 tracker mortgage would pay an extra £81.42 a month, says Moneyfacts.co.uk.

That would devour almost all of the average £1,000 annual saving from the Government’s energy price freeze. The cap has reduced expectations of how high UK inflation will go. Goldman Sachs, which had forecast a peak of 22 per cent, now expects the current 9.9 per cent rate to fall to 5.8 per cent next year. Even that is still way above the Bank of England’s 2 per cent target. Financial markets now expect the cost of borrowing to stay higher for longer.

Ministers recently gave firms a six-month lifeline to reduce energy bills, but critics have said the package lacks detail. The mini-Budget is also expected to reverse the recent National Insurance rise and planned hike in corporation tax from 19 per cent to 25 per cent.

Lower-than-expected energy prices may also give Chancellor Kwasi Kwarteng more headroom to cut other taxes in a bid to spur growth and avoid recession.

Yael Selfin, chief economist at KPMG, cautioned that the cost of the energy support package would not be independently checked in the mini-Budget: ‘It’s anybody’s guess what gas prices will be in a year’s time,’ she said.

This Is Money

Octopus Energy confirms new £40million support package and payment holidays for customers

Octopus Energy has announced a £40million support package to help customers during the cost of living crisis.

The energy firm has confirmed it will offer standing charge reductions to all households on its Flexible Octopus tariff. All customers on this standard variable tariff will automatically receive a 4% discount in standing charges compared to the Ofgem price cap.

A standing charge is the daily amount that you must pay, despite the amount of energy you use, to be connected to the grid. In addition, up to 100,000 customers in greatest need will be able to apply for “standing charge holidays” of up to six months.

Details on how to apply are yet to be released, but households on a low income will be eligible and could go several months without needing to pay a standing charge, depending on their circumstances.

The application process is expected to look at evident financial struggle, so those on benefits may stand a higher chance of being accepted.

CEO and Founder of Octopus Energy, Greg Jackson, said: “High standing charges are egregious. This £40million package is the beginning of our battle to bring them down.

“Far too many costs have been loaded onto standing charges – from grid and distribution charges to failed suppliers.

“These charges just make it more difficult for hard-pressed customers to save money through efficiency and Octopus is making a stand to change that.”Octopus’ standing charge support comes on top of huge Government support for unit rates.

PM Liz Truss ‘ flagship energy plan will see a price freeze that caps energy bills at £2,500 for two years.

The Mirror

High energy prices attract investors back to UK fossil fuel small caps

High energy prices have boosted UK small cap fossil fuel companies, lifting their share prices and allowing some to register rare profits.

Seven of the 10 best performing stocks on London’s junior Aim market are fossil fuel companies, with four focusing on UK oil and gas production, as the market rides the surge in prices since Russia invaded Ukraine.

While they collectively account for only a small portion of UK oil and gas supply, the prospect of a prolonged period of higher gas prices and the renewed focus on energy security have encouraged investors in a sector that had been struggling in the face of the global acceleration towards renewable energy.

“A heightened interest from investors in oil and gas companies naturally follows times of increased oil prices,” said Sophie Lund-Yates, equity analyst at investment platform Hargreaves Lansdown. “The situation in Ukraine and subsequent energy shortages have also brought oil and gas into the public’s mind in a way never seen before,” she said.

Companies like IGas Energy, Egdon Resources, Union Jack Oil and Angus Energy have been among the best performing stocks on Aim in the year to date, with share prices at least doubling — albeit from a low base.

“The energy crisis has led investors to see there is a future for energy in the UK,” said Chris Hopkinson, interim executive chair of IGas.

Mark Abbott, managing director at Egdon Resources, said that a year ago, leading up to the COP26 climate change conference, “there was a narrative that we can switch to renewables tomorrow.” But, he added: “The uncomfortable reality is we are going to be using oil and gas out to 2050 and beyond.”

The UK generates about 40 per cent of its electricity from burning natural gas, leaving it exposed to surging gas prices. The UK wholesale gas price is about 2.5 times higher than a year ago. Meanwhile Brent crude, the international benchmark for oil, is nearly 30 per cent up on the year.

While high energy prices have driven soaring inflation and forced the government into a £150bn support package for consumers, they have allowed the small cap oil and gas companies to make rare profits and their large international peers to report record breaking recent results.

In the six months to the end of June, Union Jack Oil recorded its first profit of £2mn, while IGas reported a net profit of £19.4mn, compared with a £12.2mn loss in the same period last year.

But while the sector might be experiencing a moment in the sun, Lund-Yates said there are reasons to be cautious. There are “plenty” of smaller companies that are “pumping money into unproven oil and gasfields, with no guarantee of success”.

Financial Times

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.