Weekend press round-up: Wales & West clashes with Ofgem

Reports in the national press this weekend include Wales and West, owned by billionaire Sir Li Ka-shing, saying it is ‘deeply concerned’ about Ofgem’s price controls, which it believes could threaten its financial health. Meanwhile, Orsted has cut several jobs as the company shifts its focus towards its corporate customers.

Gas network owned by Hong Kong’s richest family clashes with Ofgem over pricing row

A gas network controlled by Hong Kong’s richest family has fiercely criticised the UK’s energy regulator for a crackdown on financial returns paid out to foreign owners.

Wales & West, owned by billionaire Sir Li Ka-shing, said it is ‘deeply concerned’ and claimed Ofgem’s price controls threaten its financial health.

The company, which provides gas to 7.4 million homes and businesses, fears shareholders will have to put their hands in their pockets to keep up with debt repayments under plans for a new pricing regime next year.

It follows a similar row between water companies and their regulator. A string of companies with overseas owners such as Li’s other firm Northumbrian Water, said last month they were considering appealing against new rules aimed at slashing customers’ bills and clamping down on huge dividend payouts.

An investigation by The Mail on Sunday last year found Li extracted almost £1 billion in dividends from his UK infrastructure firms over two years, including those supplying gas, electricity and water.

Ofgem determines an acceptable level of returns for investors to limit the charges to consumers.

Now it plans to almost halve the returns handed to investors under new rules next year – cutting families’ bills by an average of £40 a year.

Li, 91, who was knighted by the Queen in 2000, controls five infrastructure firms in Britain. He handed over day-to-day management to his son Victor Li Tzar-kuoi in 2018.

His five infrastructure companies paid out £427 million in dividends to Li’s parent company CK Hutchison Holdings and related firms in 2018 and £541 million in 2017. This equated to 37 per cent of the total £2.6 billion profits.

Documents seen by the MoS show that three of the companies – Wales & West Gas Networks Holdings, Northumbrian Water Group and Eversholt Rail Leasing – paid out dividends that exceeded annual profits over the period.

The other two firms are Northern Gas and the highly profitable UK Power Networks.

Wales & West has now warned in a submission to Ofgem that the proposals threaten its long-term financial health.

Ratings agency Moody’s said returns will fall ‘far short’ of its borrowing costs.

Wales & West said ratings agencies would downgrade its debt as a result of regulatory intervention, adding: ‘To deliver our services sustainably, it is critical we are properly funded.

‘Shareholders cannot continue to subsidise the business for underfunded debt costs. We are very concerned it may just be a matter of time before emerging concerns amongst ratings agencies will intensify – transmitting nervousness into investors and higher capital costs into the market for regulated energy networks.

‘This would not be in the interests of our customers.’

Wales & West said shareholders had ‘demonstrated restraint’ and had agreed to suspend dividends betwen 2021 and 2026.

It also said the regulations threatened shareholder payouts after that date. Shareholders have already agreed to stump up £220 million to service the firm’s debt since 2013.

The company’s borrowing costs are higher than peers due to contracts agreed in 2007.

The gas firm faces significant cash outflows for the next 20 years under the contracts, according to Moody’s.

The ratings agency warned that the ‘expensive and long-term debt burden’ was far higher than that of competitors.

It has downgraded the firm’s debt, saying: ‘Although all companies will be affected by the expected cut in returns, Wales & West is most exposed as a result of its high borrowing costs.’

An Ofgem spokesman said: ‘Network companies have been, and remain, free to choose their preferred financing approach.

They take the risks and rewards associated with these decisions.

‘As a result, companies with higher financing costs may earn less than the sector average.’

Mail on Sunday

Motorway services fear grid not ready for electric cars

Britain’s electricity network is “not fit for purpose” and is stifling the rollout of electric vehicle chargers along key trunk roads in the UK, say motorway services operators. Electric vehicles currently account for only about 2 per cent of sales in the UK, but a steep rise is expected during the next two years as carmakers strive to meet new stringent CO2 targets and as the country gears up to hit its target of net zero carbon emissions by 2050.

Motorway service areas are preparing to increase their charging provisions to meet the jump in demand. But Simon Turl, chairman of operator RoadChef, said his company’s attempts to add charging services have been held up by distribution network operators (DNOs), which own local electricity grids and demand millions of pounds and waits of up to three years, to install new power lines.

“It feels like our power network at times is not fit for purpose to serve this massive charging need that is coming,” said Mr Turl. “We can fund this, there is no cost to the state. But we can only make that provision as quickly as the DNOs can make it happen.”

The UK has said it will ban the sale of new petrol and diesel cars by 2040, and the government’s climate advisers have recommended bringing forward the deadline to 2035. The Committee on Climate Change, the government’s official advisory body, has estimated that 214,100 public chargers will be needed to meet UK’s net zero goal.

There is no official target for the number of chargers on major roads in the UK but long-distance charging on motorways is considered essential to allay motorists’ concerns over longer journeys in battery vehicles. Most of the country’s 91 service areas have at least two chargers that can be used by any battery vehicle but many more will be needed to provide guaranteed charging for the increased number of electric cars expected to be on the road in the coming years.

National Grid, which manages the UK’s electricity network, has mapped out 54 sites along major roads in England and Wales where “ultra rapid” chargers could be connected to existing local electricity grids or its own high voltage transmission network. But construction costs are expected to be up to £1bn and there will be added annual connection charges.

“If you want people to be able to have their first and only car to be an electric car, you’re going to need to be able to go outside the range of the car and charging not to be a problem,” Graeme Cooper, National Grid’s head of electric vehicles, told the FT’s Future of Mobility conference in November.

But service station owners face a lottery as they look to boost their charging provision. Their most rural sites, which will be in areas that offer fewest charging alternatives for electric drivers, will also be the sites that are most costly to connect.

Welcome Break, a large motorway service operator, was quoted tens of millions of pounds for establishing a high-speed connection to one of its sites. “This is a nettle that needs to be grasped,” said John Diviney, chief executive. BP Chargemaster, which is about to begin installing charging points at BP filling stations on the motorway network, is also facing connectivity issues. “This is one of the challenges that as an industry, we need to be able to try and address and make it more of a level playing field,” said Dave Newton, chief operating officer.

Electricity network companies acknowledge the problems, particularly in rural locations. They say their investments are constrained by regulations that only allow them to spread the high costs of strengthening grids if they can prove there is sufficient demand; otherwise, the beneficiaries must bear the full cost themselves.

Network companies say they are trying to find alternative solutions where costs and the time involved in upgrading grid infrastructure are prohibitive. “Installing high speed chargers at service stations could require significant additional investment in network infrastructure depending on location, so the network companies are now innovating to offer customers a range of smarter, flexible options to help to reduce costs and the time of connection,” the Energy Networks Association said.

These include a cheaper “flexible connection” that, on a few occasions a year, means motorway services may receive less power. This would typically be on a cold, dark winter’s day during rush hour, when electricity demand across the country is at a peak but some motorway services operators may have access to another power source or battery to make up for any shortfall during that time.

Other grid companies argue that government intervention is needed to ensure that there is adequate provision of charging facilities along key motorways. National Grid said that for its plans to succeed, the government would be required to underwrite the overall construction cost and “pay the early years’ annual connection charges”.

FT Weekend

Wind farm giant Ørsted cuts job after discovering wind is less effective than previously thought

The largest offshore wind farm developer in the world has laid off around 15 people from its business, and is currently weighing further cuts, as the company warns that wind might not be quite as effective as previously thought.

Orsted made its UK managing director redundant at the beginning of December, in addition to two other senior executives, including Thyge Boserup, senior vice president of global development.

The Telegraph can reveal that Orsted is shifting its focus towards its corporate customers, resulting in the redundancies of around 15 employees in its Danish and German offices, as the wind farm operator mulls further cuts to its UK and Sweden offices.

“We are refocusing our business to continue our global expansion and as a result, we have had to make some changes to the management structure of some business units,” the company said. It added that some roles were “no longer consistent with this new focus.”

“Unfortunately, the changes mean that we have to say goodbye to some of our skilled employees.”

In October, Orsted’s share price fell by more than 7pc when it warned that its wind farms were producing less power than expected. The company blamed this dip in production on the fact that wind turbines block each others wind, thereby decreasing its efficiency.

Orsted suggested that phenomenon had been traditionally underestimated across the wind energy industry, which has been under pressure in recent times as bountiful government subsidies are swapped for competitive auction systems.

In 2017, Britain’s third richest man, Sir Jim Ratcliffe, bought all of the oil and gas assets of Orsted, formerly known as Dong, or Danish Oil and Natural Gas. It was the first time a major energy company had completely ditched its fossil fuel business in favour of renewables.

Daily Telegraph

Hydrogen boilers may be only choice for homes by 2025

Households could be required to install a boiler capable of burning hydrogen when they next upgrade their central heating system.

The government is considering a proposal from the heating industry to set a date by which all boilers on sale would be “hydrogen ready”, meaning they burn natural gas but can be converted easily to burning hydrogen.

Hydrogen produces only water when burned and can be manufactured with little or no greenhouse gas emissions by electrolysing water using renewable energy. It can also be made from natural gas in plants that capture and store the carbon.

About 30 per cent of carbon emissions in Britain are from heating homes, businesses and industry. The government has pledged to make Britain carbon neutral by 2050 and tackling the gas boilers in 23 million homes is one of the biggest challenges.

The government has already pledged to ban installation of fossil fuel heating systems in new homes from 2025. In November Sajid Javid, the chancellor, visited the headquarters of Worcester Bosch, a boiler company, to inspect its prototype hydrogen-ready boiler.

Martyn Bridges, its technical communication director, said that the company would be ready to sell only hydrogen-ready boilers by 2025. They would be £50-£100 more expensive than existing boilers, which typically cost about £900, he said.

The benefit over existing boilers is that they can continue burning natural gas but be converted to burning hydrogen in an operation that will cost about £150 and take a gas engineer one hour.

Mr Bridges said the switch to burning hydrogen might not happen until the 2030s but it made sense to install hydrogen-ready boilers earlier to avoid households buying a model that could become obsolete within its working life.

About 1.7 million boilers are replaced each year and requiring them to be hydrogen-ready from 2025 would mean most homes would have the necessary boiler by the mid-2030s to allow a switch to hydrogen. Burning pure hydrogen requires design changes to boilers to prevent its higher flame speed causing it to burn back down the pipe. Hydrogen flames are also invisible and create no electrical signal, meaning that a different method is required to detect that it is safely burning.

The Times

E Energy blames price cap after swinging to £4.7m loss 

A controversial energy boss has blamed the price cap on vulnerable energy customers’ bills as his firm swung to a £4.7m loss.

Paul Cooke’s firm E Energy, based in Birmingham, focuses on selling gas and electricity to customers who prepay via a meter. Meter customers’ bills have been capped since April 2017, but the cap was raised last year after a review found that it under-estimated suppliers’ costs.

In the latest accounts filed for E Energy, Mr Cooke said the “incorrect cost assumptions” had contributed to the company’s “poor performance”, but he believed the change in the cap would help for next year.

E Energy made sales of £143.6m last year compared to £115.6m in 2018 due to bringing in more customers. Profit margin of 1.16pc was sharply down on the 5.65pc in 2018, when the company made £1.4m profit.

Accounts show that E Energy is owed £3.7m by PC Connect, another company owned by Mr Cooke, which was set up in March 2018 to sell gas. The purpose of the loan, or if there is a trading relationship between the firms, is not clear. PC Connect has yet to file its first set of annual accounts, which were due on Dec 26, 2019.

E was fined £650,000 by the energy regulator last May after it found that it had colluded with Economy Energy not to compete for customers. Economy, which went into administration last January, was also fined £200,000. The companies tried to claim they were a “combined family enterprise”, because of Mr Cooke’s relationship with Economy owner Lubna Khiliji, but Ofgem rejected this case.

Mr Cooke had been a director of Economy until 2014. Ofgem stepped in after Economy’s collapse in 2018 to block 30,000 of its customers being switched to E in a deal struck a month before its collapse.

Daily Telegraph