Weekend press round-up: Water wars may be closer than you think

In our latest review of sector coverage across the national newspapers, warnings over a stark supply shortage are provoking growing interest in water from investors. An analyst has said Centrica is facing a “lost year”, ahead of its interim results this week. Meanwhile, Southern Water is due in court to face charges of dumping sewage into rivers and coastal waters.

Water wars may be closer than you think, warn experts

In the natural course of things, the River Severn’s 220-mile journey starts high in the Cambrian Mountains of mid-Wales, snakes north-east past the former industrial heartland of Ironbridge, down through bucolic Gloucestershire and its Berkeley Castle, and out into the Severn Estuary.

Plans are being explored, however, to pinch some of its water and move it over the Cotswolds and into the River Thames, where it can flow east to meet the needs of the rapidly growing population and industry in the capital and surrounding areas.

Shifting water between regions is likely to become far more common as experts look for ways to meet growing demand at the same time as supplies are being cut by climate change and the need to restore biodiversity.

The stark supply shortage is provoking growing interest in water among investors, who are pouring cash into land as well as equipment and services to help manage supplies.

Money managed just by public vehicles focusing on water in the US and Europe has nearly doubled over the latest five years to $10bn. The interest raises hopes of fixing the supply problems, but also questions over the ethics of profiting from and controlling natural resources.

“The global opportunity is pretty enormous,” says Justin Winter, portfolio manager at Impax Asset Management, one of several funds that have started focusing on the sector since the early 2000s. “Renewable energy has been popular and unpopular – water is a bit less prone to that sort of phenomenon.”

Michael Burry, the hedge fund manager who predicted the subprime crash of 2008, helped spur interest in water when he spoke in 2010 about snapping up agricultural land with good water supplies, arguing it “will be very valuable in the future”.

Yet aside from water rights, land and utilities, investors are increasingly focused on the pipes, tanks and gadgets that can store, clean, recycle and move water, and prevent leaks.

They have found a ready market not just with governments but also with private companies, such as mining or chemicals companies, who are increasingly having to build their own water recycling or treatment plants to reduce reliance on water supplies needed by people living nearby.

Having just fended off the threat of nationalisation under Jeremy Corbyn’s Labour Party, UK water suppliers now face caps on returns at levels harking back to pre-privatisation days, and are also under pressure to cut leaks by 16pc by 2025, and slash bills.

A handful of water companies, including Bristol Water and Northumbrian Water, are appealing to be allowed more financial flexibility, arguing that such stringent rules will harm investment in much-needed new infrastructure.

The tougher stance from Ofwat follows years of frustration at the industry over leaks, which currently waste about 20pc of water – equal to about three billion litres per day. Bills rose sharply post-privatisation, although are now expected to come down.

London’s monopoly supplier Thames Water and its former owner Macquarie, the Australian bank, had become a lightning rod for criticism after Macquarie and other shareholders took out £1.2bn in dividends during a decade of ownership up to 2016, even as the firm received heavy fines for pollution.

Thames Water now has 50,000 smart meters around London, and says they are helping to reduce leaks from their 20,000-mile network of pipes. The National Audit Office spending watchdog believes smart meters could help people cut their water consumption, which rose by 3pc between 2014 and 2019 to 143 litres per person per day.

Gas and electricity smart meters are already a money-spinner for Macquarie, which owns about 20pc of the UK energy smart meter market. But the relatively higher impact of water smart meters on water bills could complicate wider use.

Regardless of cuts to leaks and consumption, however, other steps will be needed to sort out England’s looming water supply problems. May 2020 was the driest month on record for England, as well as the sunniest for the UK – although it’s not yet clear whether climate change was a factor. Ofwat has set up a £469m fund to help water companies meet demand.

“There is a significant need for more water resources,” says Dr Chris Lambert, at Thames. “Due to intensity of use at the moment, we are not currently at the required resilience position.” Thames built the country’s first desalination plant in Beckton, east London, in 2010, while a new reservoir in Abingdon is also planned.

There are also water transfers being proposed between the Severn and the Thames. Water transfers already take place to a small extent, but increasing that supply is far from straightforward.

“We need to make sure we are not causing environmental damage,” says Lambert. “Some of the water comes from within Wales. That would need the Welsh assembly’s approval.” Water wars may be likely in the future.

Daily Telegraph

Centrica: seven years of struggle, only to be caught by Covid

Britain’s biggest energy supplier faces a “lost year” due to the coronavirus outbreak, which threatens to erode demand for gas and electricity and leave many homes and businesses unable to pay their bills.

Investors are braced for Centrica, the owner of British Gas, to lay bare the toll of the pandemic on the struggling business this week, amid tense talks with trade union representatives over plans to cut 5,000 employees from its workforce.

The interim results on Friday will mark the first time that Centrica’s new chief executive, Chris O’Shea, and chief financial officer, Johnathan Ford, have faced investors in their new roles, just months after the company revealed a record £1.1bn loss for 2019 and suspended the dividend.

Martin Young, a utilities analyst at investment bank Investec, said he would be looking for the new executive team to “put flesh on the bones” of Centrica’s restructuring plans in what he warned could be a “lost year” for the company.

The financial woes which have dogged Centrica for the past seven years – including falling customer numbers and a cap on standard energy bills – are expected to be compounded by the pandemic, which has dramatically reduced the demand for energy and could mean homes and businesses will be slower to pay their bills, if they pay them at all.

The British Gas division supplying business energy users is expected to be hardest hit in the first six months of the year, and may report a loss after companies closed workspaces for lockdown.

The home energy supply division could face tougher days in the second half of the year as the government’s furlough scheme comes to an end, potentially leaving many unable to pay their bills on time.

Mark Freshney, an equities analyst at banking group Credit Suisse, said the executive presentation could be the “most important event in five years” for Centrica.

Since the last chief executive strategy statement in 2015, by former boss Iain Conn, the company has crashed out of the FTSE 100 as its share price has plummeted from 275p a share to less than 40p.

Freshney has estimated that the company may take a £300m net hit due to the pandemic, as unpaid bills wipe out about £250m from underlying earnings this year and lower energy demand is expected to deal a further blow to the balance sheet.

The financial pain wrought by the pandemic could be partially offset by £100m of cost savings, he added, from Centrica’s plans for a radical restructuring of the business, including plans to sweep away three layers of management.

The company’s talks with unions have been marred by accusations that Centrica has tried to use the pandemic as a “smokescreen” to significantly erode the employment terms offered to its 20,000-strong workforce to help cut costs.

Last week, union representatives said Centrica was preparing to issue a “fire and rehire” notice which could force thousands of workers to accept worse contracts or lose their jobs.

A representative from the company assured employees that the notice would only be issued as “a last resort” if talks with the unions fell apart, and that no changes would be made to basic pay or pensions.

British Gas is under increasing pressure from a growing number of low-cost challenger brands which have steadily eroded its market share, while Centrica has struggled to sell off legacy assets in nuclear power and in the North Sea oilfields. In recent weeks it has unveiled plans to challenge its cut-price competitors by setting up a new digital energy brand, British Gas X, to offer discounted deals on electricity and gas. The online-only spin-off will compete directly with the challengers, which have lured millions of customers away from the company.

The Observer

Southern Water in court after pleading guilty to dumping sewage

One of Britain’s biggest water companies will appear in court next week after pleading guilty to deliberately dumping “poisonous, noxious” substances including untreated sewage into rivers and coastal waters near several popular tourist hotspots over five years.

Southern Water, which supplies water and treats sewage for 4.7m people in Kent, Sussex, Hampshire and the Isle of Wight, pleaded guilty to charges brought by the Environment Agency earlier this year. It is due to appear at Maidstone Crown Court again on July 27, before being referred for sentencing — a fine — in October.

A criminal investigation by the regulator charged Southern Water with 51 counts of breaching pollution laws on various dates between 2010 and 2015. Each charge against the company represented months’ — and in some cases a year’s — worth of discharge at 17 different sewage plants.

The Environment Agency allows water companies to dump a certain amount of untreated sewage into England’s seas and rivers.

But in previously unreported court documents seen by the Financial Times, Southern Water is accused of having “knowingly permitted . . . entry to coastal waters of poisonous, noxious or polluting matter and/or waste matter and/or sewage effluent, namely untreated sewage otherwise than as authorised by an environmental permit”.

Areas affected included the popular Sittingbourne, Herne Bay and Whitstable beaches and the Beaulieu river in the New Forest.

Another investigation by the Environment Agency is under way that covers pollution incidents after 2015 but it has not yet brought any criminal charges. The Environment Agency declined to comment.

The current case is likely to reignite criticism of England’s privatised water companies, which have been accused of failing to invest in crucial infrastructure that would prevent damaging pollution and leakage incidents at the same time as allowing owners — many of which are private equity and sovereign wealth funds — to extract lucrative dividends and pay packages.

Southern Water said it had set up a “pollution reduction plan (agreed with the Environment Agency) that tracks the root causes of incidents and puts in place measures to prevent recurrence”.

“Last year 62 of the 83 designated bathing waters around the 700 miles of coastline met the Defra ‘Excellent’ standard. None fell below ‘Acceptable’. Our beaches and coastal waters are the cleanest they have ever been since the industrial revolution,” it added.

FT Weekend

Can a hydrogen boom fuel a green recovery for Britain?

At the entrance to Saltend Chemicals Park, on the outskirts of Hull, there is a small blue heritage-style plaque, placed there four years ago by the Royal Society of Chemistry. It proudly commemorates: “100 years of innovation in supplying the UK with transportation fuels and important base chemicals.”

A sense of pride in Saltend’s past is understandable: places like this helped drive Britain’s industrial age. But the biggest, most dramatic innovation of all may be yet to come. This month, the Norwegian energy company, Equinor, (formerly Statoil), unveiled proposals to install the biggest facility in the world for making hydrogen from natural gas, using capture and storage technology to extract and bury the resulting carbon under the North Sea.

The Humber region is currently the biggest emitter of carbon in Britain and the second-highest emitter in Europe. Equinor’s plan, if it goes ahead, would amount to a green revolution at Saltend, allowing businesses on the site to convert to clean energy. And if the rest of the region follows suit, by 2030 this windblown stretch of North Sea coastline could conceivably be one of the world’s leading green energy hubs.

“This is a plan,” suggests Al Cook, the head of Equinor’s English operations, “which would help transform the UK’s largest industrial cluster into its greenest cluster. We are one of the largest energy producers in the world. Saltend is one of the oldest industrial hubs of its kind. Humberside has all the natural resources required on its doorstep. It is a chance for the UK to get on the front foot in the green energy race.”

Get ready for Britain’s hydrogen boom? Definitely maybe.

In Britain’s energy sector, as other countries invest in the hope of a virtuous cycle of green growth, there is a growing nervousness. Having led the way in early wind farm technology, the UK failed to capitalise and become a major manufacturer and exporter. In the electric car industry, it has fallen far behind Germany and other competitors after failing to invest enough in battery production capacity. Equinor has made it clear that it will only proceed with its blue hydrogen plans for Hull if the government plays its part, sharing the risks of investing in a fledgling industry. “All our experience,” says Cook, “tells us that in projects of this scale and ambition, it only works when governments and companies work together. We will need clear frameworks and assurances and a commitment to investment from London.”

Julia King, Baroness Brown of Cambridge, is the deputy chair of the Committee on Climate Change, and one of the country’s most influential backers of hydrogen. She believes that if Britain acts decisively now, it can take a giant step towards meeting the legal requirement for net zero emissions by 2050 and become a world leader in a lucrative new market. “It is urgent for the UK to get on with this,” said King. “In terms of hydrogen technology, we have a very strong position at the moment. In electrolysis, in storage technology and other areas, we have really dynamic companies which we need to help grow.”

Britain also enjoys a natural advantage, she points out: the winds that blow in from the North Sea and can be turned into green hydrogen. “This country has the best offshore wind resource in Europe. We have all the ingredients to make this an industry which the UK is really successful at; one which will reduce our emissions and which will provide real export opportunities for cutting-edge technologies.

“We could also be selling into a huge export market for hydrogen. We could even get to the position of being sellers of electrolytic hydrogen to Germany.

None of this is likely to happen, though, without significant government intervention, both to lend confidence and to help shape an industry which, at the moment, barely exists. “The challenge is that we’ve actually got to create both supply and demand,” says King. “There’s no point in producing hydrogen unless you have a way of using it. And there’s no point in developing buses, trains and so on unless somebody is going to be able to supply hydrogen to you.

“We need the government to form something like a hydrogen industry council to bring the demand and supply side players together to discuss how to start the industry.

And, obviously, it would be helpful to know that there would be money available. When I was on the board of the green investment bank, one of the things we saw was the confidence that government gave when it came to investing in early offshore wind. Having government as the lead investor brings in other investors.”

The Observer

Inefficiencies in wind turbine infrastructure prompts review

The energy minister has ordered a review into the legal framework for building offshore energy infrastructure in order to make it easier to roll out wind turbines across the country (as previously reported by Utility Week).

Britain’s current approach to the transmission of electricity from offshore wind to onshore power stations was developed when the sector was still in its infancy and has created numerous issues as the industry has blossomed in recent years.

Project developers are currently responsible for building the required cables to transfer the power their wind turbines generate. But this approach may be inefficient as Britain seeks to ramp up its renewable energy production ahead of 2050 – the date by which it has pledged to have substantially reduced its carbon emissions.

Issues have abounded with the UK’s offshore electricity transmission in recent years. Millions of British households missed out on clean energy generated by strong winds in January because a crucial undersea cable stopped working, and record levels of power created by wind farms in Scotland could not be piped to heavily populated parts of England due to faults with the Western HVDC Link, a network of underwater cables that runs down the UK west coast.

As a result, the farms were told to produce less energy to avoid overloading nearby areas. The National Grid must now pay them more than £30m in compensation – a bill that will ultimately be footed by consumers.

“In the context of increasingly ambitious targets for offshore wind, constructing individual point to point connections for each offshore wind farm may not provide the most efficient approach and could become a major barrier to delivery,” the Government said in a statement announcing the review.

Daily Telegraph

Shetland interconnector worth £600m gets approval from energy regulator

Energy regulator Ofgem has approved a huge power link cable from the Shetland Isles to the Scottish mainland.

The decision, announced by the regulator yesterday, is “crucial” to the future of energy developer SSE Renewables plans to build the 103-turbine Viking Onshore Wind Farm on Shetland.

A proposal was tabled by SSE subsidiary Scottish and Southern Electricity Networks (SSEN) to build a 600 megawatt (MW) subsea electricity transmission link was rejected last year.

But SSE’s plans for the construction of the Viking project was handed a significant shot in the arm in April after an energy regulator said it was ready to rubber stamp proposals for an energy link with mainland Scotland on the provision the wind farm reached a final investment decision.

It is understood the project will support around 400 jobs at peak construction with a further 35 full-time local operation and maintenance jobs throughout its life.

SSE’s chief executive, Alistair Phillips-Davies, said today’s decision marks a “significant milestone in delivering a ‘whole system’ solution to meet Shetland’s future needs”.

He added: “It has been a long journey, but with a combined investment in excess of £1bn, the construction of the subsea transmission link, all associated onshore infrastructure and the Viking Energy wind farm will deliver substantial socio-economic and environmental benefits to Shetland’s, Scotland’s and the UK’s economy, supporting hundreds of skilled jobs in the process.

Viking Wind Farm lost out on a UK Government subsidy bid last September, forcing SSE to look at alternative routes to market.

But last month, SSE Renewables announced it had secured £580 million backing for the development.

Scheduled for completion in 2024, the 443 megawatt (MW) project will be the UK’s largest onshore wind farm in terms of electricity output.

It is understood the development, which will cover 17,396 acres across Shetland’s central mainland.

Frank Hay of campaign group Sustainable Shetland called the decision a “very disappointing news for the future of Shetland and its security of energy supply”.

He said: “A sad day indeed for the people of Shetland, and also energy consumers, who will end up paying for it all. An energy solution for Shetland which should have cost about £100 million will end up costing £1.3 billion and we will probably end up with an unreliable system.

The Press & Journal

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.