Weekend Press: Thames Water plots break-up as it scrambles to avoid nationalisation

This week’s roundup of sector news from the weekend’s national press includes speculation that Thames Water is about to be broken up in a bid to avoid renationalisation; news that the Environment Agency chair Alan Lovell had dinner with water company lobbyists days before plans for a 40% hike in bills were reported; and a warning from the UK’s largest battery storage fund that investment in the sector is at risk because of the way the country’s electricity system is run. 

Thames Water plots break-up as it scrambles to avoid nationalisation

Thames Water is exploring a radical break-up plan as the threat of nationalisation moves closer.

A carve-up of the company is among several options being studied by executives as Thames attempts to navigate a severe cash crunch that could precipitate its collapse. The company is buckling under the weight of an £18bn debt pile.

Under the proposals being looked at, Thames Water, which serves 16 million customers, could be split into two separate smaller companies: one covering London, the other serving the Thames Valley and Home Counties regions.

It is thought that dividing up the company would make it easier for Thames’ operations to be sold on to a rival once it has been stabilised. A break-up would most likely be pursued if Thames were temporarily nationalised, City sources say.

Bulb Energy spent more than a year inside the Government’s Special Administration Regime in 2021, before its 1.5 million customers were eventually transferred to Octopus Energy.

Thames is edging closer to a potential nationalisation after its parent company missed a debt payment this week. Some believe Thames could ultimately end up being dismantled into multiple pieces.

Professor Sir Dieter Helm, who advised the Government on water policy until 2020, has raised concerns that Thames Water is “too big to be effectively managed – too big in scale and too big in the multiplicity of functions”.

He said on Friday: “The special administrator should seize the opportunity to consider splitting the business up between London and the rest of the catchment, and also splitting water from sewage.”

An industry source said: “They are trying to carve it into two but when the carving knives come out, the business might end up in more pieces.”

However, there are doubts about whether competitors have the appetite to take on parts of Thames.

It is understood that Severn Trent chief executive Liv Garfield rejected talk of a potential takeover when asked by Tory backbenchers at a dinner last month.

Thames’s London operations may also prove difficult to place if separated from the rest of the business. One City investor said his fund would not touch Thames’s operations in the capital because of the difficulties of digging up roads and the costly disruption to peoples’ lives. He said: “I would not go anywhere near London.”

Fresh doubts were cast over Thames Water’s future on Friday after its parent company Kemble missed interest payments on a £400m loan. One bondholder told the Telegraph that the default was likely to trigger a formal restructuring process.

It emerged this week that two state-backed Chinese banks are likely to have a significant hand in determining the company’s future. Kemble is meant to repay a £190m loan by the end of April to a consortium of lenders including Bank of China and the Industrial and Commercial Bank of China.

Shareholders have confirmed that they are cutting off fresh funds from the business, meaning that the repayment deadline is set to be missed.

The deepening crisis could force the Government to reluctantly step in and nationalise Thames at vast cost to the taxpayer. As much as £5bn may be needed “just to keep the lights on”, according to sources close to the company.

Colm Gibson, managing director at Berkeley Research Group, said: “It is far from certain that Thames Water would emerge from special administration as a single large company. It is entirely possible that it could be broken up into a series of smaller water companies serving local areas.”

However, ministers are reluctant to intervene with a general election looming.

The company has pointed out that it still has £2.4bn of liquidity available. Yet that cash pile could quickly shrink given the prospect of growing debt finance costs and looming fines from Ofwat, the regulator.

Analysts at JP Morgan warned earlier this week that Thames could be hit with fines in the region of £200m linked to poor performance and dividend payments.

The situation at Thames worsened late last month after its owners – a consortium of pension funds and foreign states – pulled the plug on a £500m funding package, claiming that Ofwat had rendered the business “uninvestable” by refusing to allow substantial bill increases.

Thames Water declined to comment.

The Telegraph

Thames Water pays millions to City advisers

Thames Water and its lenders are spending millions of pounds a week on management consultants and bankers as the utility fights for its financial survival.

Rothschild, EY and Alvarez & Marsal are among half a dozen firms called upon by Thames and its associates to help find a way to repay their enormous debts. On Friday, Thames’s owner, Kemble, defaulted on one such loan.

Alvarez & Marsal, acting for Kemble, is trying to convince lenders to stump up more money. EY is advising a group of Kemble’s lenders on recovering £190 million due at the end of this month.

Thames Water is using Rothschild, the investment bank, for advice on how it can execute its AMP8 turnaround. Ofwat, the water regulator, sets spending cycles in five-year periods called asset management periods (AMPs), with AMP8 running from 2020 to 2025.

The advisory firm Teneo has just been appointed “administrator in waiting” for Thames Water Utilities, a ring-fenced operating company. This means the US firm is waiting in the wings to take over if Thames buckles.

AlixPartners, the turnaround firm, has been advising Thames on restructuring plans since last year, when the company tapped investors for money to service its debts.

At around the same time, Thames brought in Slaughter & May, the legal firm, also to advise on how it could finance a turnaround plan.

The labyrinthine structure put in place by Thames’s previous owner, the Australian infrastructure investor Macquarie, is adding to the complexity, creating more work for consultants.

The Times

Environment Agency chief had dinner with water company lobbyists days before plans for 40 per cent bill hikes were reported

The environment watchdog boss had dinner with water company lobbyists days before plans for a 40 per cent hike in bills were reported, the Lib Dems have revealed.

Environment Agency chief Alan Lovell accepted a £96 dinner from Water UK, the industry body representing Britain’s water firms on the 20 June 2023.

This was just one week before reports suggesting water companies were pushing for a 40 per cent rise in bills to improve the UK’s water infrastructure were published.

The regulator and water firms were accused of having a ‘chummy relationship’, by the Liberal Democrats, who revealed the hospitality and gifts received by Mr Lovell in a freedom of information request.

The Environment Agency’s role is to investigate and punish water companies found to have illegally polluted waterways.

Lib Dem Environment spokesperson Tim Farron MP said: ‘This will rightly stink to the public. Government officials shouldn’t be accepting a penny from a disgraced industry which pollutes our rivers whilst hiking bills.’

The Lib Dems also revealed Mr Lovell accepted a £200 dinner and hotel stay from Yorkshire Water, as well as a £60 dinner from Severn Trent Water.

Mr Farron added: ‘This is a complete mess and further proof of a chummy relationship between water firms and the Government.

‘Under this Conservative Government, sewage dumping and water bills have both skyrocketed, hand in hand.

‘The water industry is getting away scot-free whilst treating officials and regulators to swanky dinners. It is an absolute scandal.

‘This industry is rotten to its core and needs to start from scratch, starting with a new regulator, a ban on bonuses and hospitality gifts and, above all else, a complete reform of water companies so profit is no longer put ahead of the environment.’

The Liberal Democrats have called for a ban on the water industry treating Government and regulators to expensive hospitality.

The party also wants a tough new regulator, and for water firms to be reformed to ensure profit is no longer put above environmental goals.

An Environment Agency spokesperson said: ‘All of these meetings were working meetings and all expenses were properly declared, as per the strict rules we have in place on gifts and hospitality.

‘It is not unusual for the Environment Agency Chair to meet with industry leads to challenge them on their performance and outline the improvements that we as a regulator expect to see.’

Daily Mail

National Grid ‘throttling’ battery storage development with underuse

The UK’s largest battery storage fund has warned that investment in the sector is at risk because the way the country’s electricity system is run means the technology is not used widely enough.

Ben Guest, managing director of the new energy division at Gresham House, said National Grid is underusing battery storage that is already incorporated in the system, although it is seen as a crucial part of efforts to cut carbon emissions.

“The underutilisation of batteries by the ESO [National Grid’s electricity system operator] risks reducing investment,” Guest told the Financial Times, adding that this was “throttling the development of battery solutions in the UK . . . not to mention slowing the UK’s legal commitment to meet net zero[carbon emissions] by 2025.”

Battery developers have also been affected by falling power prices and increased competition from a surge in capacity, hitting revenues and share prices.

Batteries are an increasingly important part of the electricity system, because they help smooth out surges and lulls in the supply of electricity from wind and solar power.

Their number has grown rapidly in recent years in Britain as renewable power production has increased, with about 130 sites providing 4GW of total capacity, according to industry group Regen.

Battery storage facilities earn revenue by buying and selling power in the wholesale market and can also be paid by National Grid’s ESO to store and discharge power to smooth out supply and demand.

However, the ESO frequently ends up buying electricity from other sources, such as gas-fired power plants, even when batteries are available. In some cases this has been for technical reasons such as older computer systems that are ill-suited to running multiple small assets such as batteries.

Lower volatility in the wholesale market has also affected battery developers’ revenues, while their earnings from providing other services to ESO have also fallen.

Sachin Saggar, an analyst at Stifel, calculates that battery storage revenues had fallen to about £50,000 per megawatt by the end of 2023, down from £150,000 per MW in 2022.

“If it’s sustained at this level, they aren’t making enough money [for it] to make sense to build a new battery,” he said.

Gresham House, which has a battery storage portfolio of about 640MW, scrapped its fourth quarter dividend in February, and warned it would be “challenging to generate the cash required to cover the dividend this year”.

National Grid has been making changes to try to use batteries more. However, Olly Frankland, an electricity storage specialist at Regen, said they had been “a little bit slower than they should have been”.

“There is encouraging messaging and good direction of travel, but I think what we’re asking for is a wider role for battery storage.”

The industry had been to an extent a “victim of its own success” he said, with about 1.6GW coming online last year.

“There’s been a lot of battery storage coming on to the system,” he said but noted that demand had not kept pace.

National Grid ESO declined to comment.

Financial Times

Utility Warehouse boss Stuart Burnett: ‘We can take on the Big Six of energy’

Stuart Burnett joined Utility Warehouse in 2016, having started his career as a lawyer in the City before moving in-house at an insurance firm.

He worked his way up in an unusual fashion, going from a senior lawyer to working in operations and eventually becoming co-CEO in November 2021.

The company itself does things slightly differently, too. Unlike other players in the energy market, Utility Warehouse also offers broadband, mobile and insurance, and allows customers to ‘bolt on’ different services under a single bill.

The softly-spoken Burnett is due to take the reins on his own later this year and is on a mission to grow its customer base. It recently became the UK’s seventh-biggest energy supplier, knocking on the door of the established Big Six.

He told [Daily Mail’s] This is Money about his plans, and why he thinks Utility Warehouse’s multi-service model could make it the challenger that all four markets need.

FTSE 250-listed parent company Telecom Plus launched Utility Warehouse in 2002 as a subsidiary through which to sell energy, mobile and broadband deals.

Its unique selling point is  that it offers core household services in a bundle with a single bill.

Customers can pick and choose which services they want, and while they can have just one, they’ll only really receive the benefits and discounts when they sign up to two or more.

The more services they add, the bigger the discount they receive.

It recently reached 1million customers across the UK, the majority of which are energy customers. The company says an increasing number are taking energy and one or two other services, with an average of three services taken per customer.

We don’t think of ourselves as an energy business even though we supply energy, in the same way we don’t think of ourselves as a broadband, mobile or insurance business,’ says Burnett.

‘By having that singular relationship for all of these different services, we have a much tighter, closer relationship with our customers than just a standalone energy supplier or broadband or insurance provider.

‘They view us as a key part of how they run their lives and their home.’

It has quietly built a solid but still relatively small footing across each of its sectors. In its most recent results, Telecom Plus said energy prices had been a strong driver of revenue in the past year.

It also said its customer acquisition was largely down to its ‘unique and hard-to-replicate word-of-mouth acquisition model’.

Full interview, available here.

Daily Mail

South West Water ‘confident’ of no hosepipe bans this year

A water company has said it is “confident” there will be no hosepipe bans in Devon and Cornwall this year.

South West Water (SWW) imposed a hosepipe ban in Cornwall in August 2022 before it was extended to large parts of Devon in April 2023.

All water restrictions were lifted in September 2023.

SWW said recent heavy rainfall, investments and people saving water had put water levels in a “strong position”.

The largest reservoirs are 40% more full than in March 2023, the utility company reported last week.

SWW said Roadford Reservoir in Devon was full, whereas this time last year it was at 68% of capacity.

Colliford Reservoir was at 98.5% capacity compared with 60% at the same time last year, it said.

David Harris, SWW’s drought and resilience director, said heavy rainfall was not the only factor that had created additional capacity.

He added: “As a direct result of our investments, interventions, the weather and our customers reducing their use of water, we are confident that we are in a strong position to navigate whatever weather we face this year without the need for water restrictions.”

BBC

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.