Weekend press: Thames shareholders to inject £1bn

The news this weekend continued to be dominated by Thames Water: One of its major shareholders has agreed to put its hand in its pocket to stop it falling into special administration; commentary on how the company reached this point and how it compares to the wider sector took up many column inches. Elsewhere, BMW backs hydrogen for vehicles and energy bosses warn of winter gas price spikes

Shareholders plan to flood ailing Thames Water with £1bn

Thames Water’s shareholders are planning to inject £1 billion into the ailing business in an attempt to stop it falling into administration.

Officials from the Treasury, the environment department and Ofwat, the water regulator, held crisis talks this week after it emerged that Thames Water was struggling under its debts of £14 billion.

The Times has been told that shareholders in the company, which include China’s state-owned sovereign wealth fund, are confident that they can stave off administration. They are expected to announce a plan in weeks.

It comes as one of the largest investors in Thames Water has indicated its support for the utility, which collects and treats sewage for 15 million customers in southeast England. In the first public sign that the company will not be abandoned by its shareholders, the £90 billion Universities Superannuation Scheme, the academics’ pension scheme that has a 20 per cent stake in Thames Water, said in a statement that “we have given our backing to Thames Water’s turnround plan and net zero road map and engage with them regularly to support their long-term strategy”.

There are fears for the financial health of up to four other English water companies.

The boss of Severn Trent has proposed transforming utilities into “social purpose” companies to appease critics in the Labour Party. Liv Garfield, the chief executive of Severn Trent, has suggested reforming water and energy groups into companies that remain in private hands but must plan for the long term because this may be “attractive to the Labour leadership”.

Garfield made the suggestion in an email to other utility bosses inviting them to a confidential meeting to discuss policies that may avert the nationalisation of companies that are failing to provide a good service.

The Times

Thames Water crisis could hit UK investment, ministers warn

The crisis at Thames Water could deter overseas investment into the UK, ministers and industry figures have warned, as the utility seeks to raise at least £1bn to shore up its finances.

Conservative ministers maintain that concerns about the financial resilience of water companies — and “intemperate” talk of possible temporary nationalisation — could create a “risk premium” for investing in UK infrastructure.

Criticism of Ofwat, the industry watchdog, has also been mounting as Thames Water prepares for talks this week with investors and regulators to secure the £1bn equity injection.

One minister told the FT: “The people who have questions to answer are Ofwat. There are serious questions about the regulation of the sector. “When politicians start to talk about nationalisation or a windfall tax or a sudden jerk on the wheel of regulation, that pushes up the risk premium for the UK.”

Thames Water, England’s largest privatised water utility, is wrestling with £14bn of debt and has yet to receive a full commitment from investors that they will invest more equity to stave off a cash crisis. The group insists there is no immediate cash crunch and had £4.4bn liquidity at the end of March. But ministers were forced last week to dust down plans to place failing water companies into a “special administration regime”.

John Reynolds, chief executive of Castle Water, which provides water and sewage services to business customers in London and the south-east, warned that Thames Water’s troubles were likely to deter overseas investors.  “The impact of a special administration would impact the availability of financing and the cost of financing for all UK infrastructure,” he said.

New rules enable Ofwat to curb dividend payments if a business is under financial stress or fails to meet environmental commitments. “There is a willingness to commit more capital but right now there is a feeling that the regulator, the government, and the shareholders are not in agreement,” said one industry investor.

The regulator has also been criticised for presiding over a regime that allowed investors to borrow against groups’ assets and extract dividends while failing to sufficiently invest in infrastructure. The water companies have jointly racked up £60bn in debt and paid out more than £72bn in dividends since privatisation in 1989.

Ofwat said its new rules allowed it “to better hold companies to account and take enforcement action when they get it wrong” so it could “stand up for customers”. Two people close to Thames Water added that Sarah Bentley abruptly quit as chief executive last week after differences with the board over the pace of change.

“The turnround plan needs shareholders to put money in and Sarah was a casualty of that process,” one person close to the company said.

Thames Water declined to comment.

Lord Andrew Tyrie, Tory peer and former chair of the Competition and Markets Authority, called for a thorough review of regulation in the UK, saying some regulators had been “captured by vested interests”.

“The regulators are letting the public down,” Tyrie told the BBC’s Week in Westminster. “The poor quality of regulation is stifling growth. It is now a serious problem.”

Financial Times

Water has a private equity, not a private ownership, issue

In 1989, on the eve of privatisation, the European Commission took legal action against the UK government for its failure to meet standards on drinking water.  The fracas did not disrupt the flotation of regional water authorities in England and Wales, which were given more time to reach standards they should have met in 1985.

The logic of privatisation — as laid out in the regulator’s “book of numbers” — was that the private sector would deliver crucial investment long ignored by the government. And it did, to some extent. Capital investment rose by 85 per cent in the decade following privatisation; we no longer worry about our drinking water; leakage has fallen by a third since the mid-1990s.

Yet the structure put in place then has failed. The huge investment the system again needs, given population growth and a changing climate, is in doubt. It is worth prising apart some failures.

One relates to the financial resilience of water companies, given the risk that Thames Water with its £14bn in debts will require state help and that Yorkshire Water has raised £500mn from its private equity and sovereign wealth fund shareholders.

This is largely a private equity, not a private ownership, issue.  The three listed companies in the sector, Severn Trent, United Utilities and South West Water (via Pennon Group), alongside Dwr Cymru, the not-for-profit Welsh water company, have the lowest regulatory gearing levels, broadly in line with the “notionally efficient” level set by Ofwat, which has drifted up over time.

Figures for gearing levels from Martin Young at Investec show a sudden leap at Thames after its acquisition by Australian “vampire kangaroo” Macquarie in 2006, which “hollowed out” the group in its 11 years of ownership, in the words of recently departed boss Sarah Bentley.

Gearing jumped at Southern Water around the time Royal Bank of Scotland (in its own irresponsible heyday) took control in 2003. Yet the regulator didn’t seem troubled by questions of resilience until 2014.

“The regulatory structure set up in 1989 worked relatively well until the entry of much more aggressive private equity firms, who worked within the rules to increase debt and extract substantial returns to shareholders in a way that hadn’t been envisaged,” said Kate Bayliss, an infrastructure expert at Soas, University of London.

This is not to excuse or overlook the severe operational failings of listed water companies. No one has a clean sheet on environmental problems like leakage and sewage overflows — including Dwr Cymru or publicly owned Scottish Water.

South West has had a particularly poor pollution record; United’s sewage pumping is behind the recent bathing ban on Blackpool beach. Ofwat, dancing to the political mood of the times, prioritised keeping bills low over investing in crumbling and increasingly overwhelmed infrastructure.

Today’s bill payers will be asked to pay up for that failure, just as some investors must stump up for the cynical extraction of dividends by owners past. Only one of these groups, however, had a choice on getting involved.

Less overburdened balance sheets have more flexibility to respond to public anger and regulatory demands. And dismissing all providers of long-term private capital isn’t helpful, given the immense investment needs ahead, in water but in energy too.

But nor is treating all investors alike, to the maddening extent that Macquarie was welcomed back as an owner of struggling Southern Water, four and half years after it sold out of Thames.

There are no easy answers, given the need to balance attracting huge investment with tougher operational and financial regulation. But considering who shows themselves to be a responsible owner, and the apparent restraining influence of the public equity markets, seems a decent place to start.

Read the full article at the Financial Times

Energy boss says prices may rise this winter

Energy prices could spike this winter forcing governments to step in and subsidise bills again, the head of the International Energy Agency has said.

If the Chinese economy strengthens quickly and there is a harsh winter, gas prices could rise, putting pressure on consumers, Fatih Birol said.

He added that governments should push for energy-saving and boost renewables.

However, a UK government spokesperson said energy bills are set to fall by an average £430 this month.

Gas prices soared after Russia’s invasion of Ukraine, driving up energy bills around the world.

A number of governments then stepped in with support for households, including in the UK, to try to soften the blow to consumers.

Mr Birol told the BBC’s Today programme that many European governments made “strategic mistakes”, including an over-reliance on Russia for energy, and that foreign policy had been “blindfolded” by short-term commercial decisions.

He said this winter “we cannot rule out” another spike in gas prices.

“In a scenario where the Chinese economy is very strong, buys a lot of energy from the markets, and we have a harsh winter, we may see strong upward pressure under natural gas prices, which in turn will put an extra burden on consumers,” he said.

The Chinese economy had been bouncing back after Covid restrictions were lifted, but recently its economy has been slowing down.

Ratings agency S&P Global this week cut its forecast for Chinese growth, saying “the risk is that its recovery loses more steam amid weak confidence among consumers and in the housing market”.

Investment banks including Goldman Sachs have also been cutting forecasts for Chinese growth.

Nevertheless, Mr Birol said governments including the UK should “continue to push measures to save energy, especially as we enter the winter”.

They should also push renewable technologies so they “see the light of day as soon as possible” and cut the time it takes for them to get permits, and look for “alternative energy options”, he said.

He said he “wouldn’t rule out blackouts” this winter as “part of the game”.

“We do not know yet how strongly the Chinese economy will rebound,” he said.

National Grid said last winter that short power cuts were a possibility – in the end, this was not necessary.

A UK government spokesperson said: “We spent billions to protect families when prices rose over winter covering nearly half a typical household’s energy bill, with them set to fall by around £430 on average from this month.”

Read more on the BBC

Green levies should be funded by taxes, campaigners say

Fuel poverty campaigners are calling for green levies designed to fund schemes such as home insulation to be funded through taxation rather than being fed back into energy bills.

A two-year suspension of the levies, which add around £170 a year to an energy bill, was announced last autumn by the Liz Truss government amid rising fuel prices. It meant the levies were temporarily funded by the Treasury.

But that funding has now come to an end after just nine months, along with the demise of the Government’s energy price guarantee, as energy prices have fallen.

However, the levies will go unnoticed by billpayers as bills are dropping and the new, lower price cap set by the regulator Ofgem is thought to have already factored in the costs.

Simon Francis, the co-ordinator of the End Fuel Poverty Coalition, said: “We would prefer the vital funding needed for long-term energy efficiency and fuel poverty prevention programmes to be funded through general taxation.

“These programmes are vital to ensuring we end fuel poverty in the long run. The Government could have used the time that the energy price guarantee was in place to work out a way of doing this fairly rather than through energy bills.”

He added: “Our understanding is that Ofgem has already included these costs as part of the price cap that came in on 1 July, so this is not an increase on people’s bills from what has already been announced.

“If the Government did move funding off bills and onto general taxation, that would result in a welcome reduction in bills this winter.”

Around 27 million homes in England, Scotland and Wales can expect their energy costs to drop over the summer after industry regulator Ofgem lowered the price cap on a typical annual dual-fuel tariff to £2,074 a year.

However, research by the Money Advice Trust suggests that around 5.5 million UK adults are now in energy bills debt – a rise of 2.1 million on the previous year.

Campaigners are calling on the Government to help households more this coming winter as people’s savings are being eroded by inflation and high energy bills.

Mr Francis said: “The dangerous combination of inflation, high energy prices and reduced savings means that people will be even less able to keep themselves warm this winter. We’re already seeing record levels of energy bills debt being racked up. People just won’t be able to cope.

“We need a programme of debt relief as well as more financial support for the most vulnerable this winter – alongside ramped up programmes to improve energy efficiency.”

A Government spokesperson said: “Thanks to falling wholesale prices and Ofgem’s new price cap – energy bills come down by around £430 on average and customers will not be affected by a price increase from green levies.

iNews

BMW tells Britain to rev up for hydrogen cars

The UK must back a network of hydrogen filling stations or lose out to the Continent and Asia in the roll-out of greener cars, a senior executive at BMW has warned.

Jürgen Guldner, manager of hydrogen technology at the German car giant, said: “If the UK government wants to decarbonise, then get a hydrogen strategy, decarbonise the commercial vehicle sector and roll it out to passenger vehicles.”

BMW has a fleet of nearly 100 hydrogen-powered iX5 cars that it is testing around the world, and plans to launch a commercial hydrogen car later this decade.

Hydrogen’s advantage, proponents say, is that it produces no carbon emissions from the exhaust pipe. Hydrogen cars can also be filled up in a matter of minutes at a filling station similar to a petrol station, whereas battery electric cars can take hours. The fuel is also expected to be useful in decarbonising lorries that would be too heavy if they carried an electric battery.

Guldner said BMW customers liked the speed and convenience of a hydrogen-fuelled car, but acknowledged that the infrastructure globally lags electric charging points by some distance. The UK has just 12 hydrogen filling stations, according to BMW, down from about 20. “What we’ve seen in the last few months is stations closing in the UK because there’s not enough consumption,” Guldner said. “So we’ll have to see if the commercial vehicle sector is able to kickstart it.”

He added: “If there is infrastructure being built out in the UK, we will be ready to bring a car to the market in the UK. If there’s no hydrogen fuelling stations in the UK, we will bring the cars to Japan and Korea and the rest of Europe, where there is a fuelling station network being built.”

BMW’s pilot cars are produced at a special facility in Munich. The cars’ drive train includes a hydrogen fuel tank that can hold up to 6kg of the gas. A chemical reaction takes place in the fuel cell between the hydrogen and oxygen from the air.

BMW argues that it will be quicker and cheaper to build two separate infrastructures for hydrogen cars and battery electric cars, rather than choosing just one technology. This is because electric charging points become more expensive over time as more upgrades to the electricity grid are required, Guldner said.

The drawback with hydrogen is that it requires a huge amount of energy — preferably from renewable sources — to make. BMW concedes that there is an issue with energy loss, but argues that this does not matter if hydrogen can be produced at lower cost in sunnier regions such as the Middle East.

David Cebon, professor of mechanical engineering at Cambridge University, said the inefficiency of hydrogen meant it would cost at least three times more to power a hydrogen car per kilometre than a battery electric car.

“The whole problem with hydrogen is that its hopelessly low efficiency,” he said. “When you convert renewable electricity into hydrogen, compress and store it, and use it to propel a fuel-cell vehicle, only about 23 per cent of the energy reaches the wheels. For a battery electric vehicle, about 69 per cent of the energy reaches the wheels.”

He added: “It is clear that hydrogen vehicles have had their ‘Betamax moment’ and that battery electric vehicles will dominate the future of personal mobility.”

The Times 

Ex-Thames Water owner accused of ‘money-grabbing’ cuts to Cadent pension scheme

The former owner of crisis-hit Thames Water has been accused by union leaders of staging a “cost-cutting money grab” at another critical UK infrastructure asset under its control, as it emerged that Cadent Gas is considering cuts to its pension scheme.

Macquarie, the Australian banking powerhouse that owned Thames for a decade, has led a consortium controlling Cadent since 2016. Cadent, Britain’s biggest gas network, serving 11 million people, was formerly part of National Grid.

It is understood that Macquarie bosses are considering closing Cadent’s defined benefit pension scheme, provoking anger among trade unions, which are consulting about taking strike action over the issue.

The scheme, which closed to new members in 2002, has 430 active employees with at least 20 years’ service as well as several thousand retired members.

It is understood that Cadent is considering closing the scheme because it believes the level of investment required could be better spent on new technology and training its workforce.

The GMB union, which represents workers at the company, said the defined benefit scheme was “fully funded and in surplus” and estimated that it cost Cadent about £10m a year to service.

Gary Carter, a national officer at GMB, said: “This is a cost-cutting money grab by Macquarie to increase profits and dividends to shareholders.

“The pension scheme is not in trouble; it’s fully funded and in surplus. Cadent Gas makes hundreds of millions of pounds’ profit and pays large dividends.

“These are long-serving and skilled employees who have given many years of service in the gas sector, serving communities and customers.

“Cadent was well aware when it purchased the business that the pension scheme was there and it has a moral and financial obligation to it.”

Last month, Cadent said that an increase in revenues had helped it record a £945m profit in the 2022-23 financial year, up from £685m the year before. It paid a £350m dividend to shareholders and had net debts of £7.4bn.

It said the defined benefit pension scheme had a £729m surplus in 2023, down from just over £1bn in 2022.

Cadent also told the union it paid disproportionately more into the defined benefit scheme compared with the defined contribution scheme, which has just over 6,000 members.

The Guardian

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.