Magazine article The Spectator

Power Failures

Magazine article The Spectator

Power Failures

Article excerpt

Politics makes it hard to pick winners in the energy sector

Power companies are the new banks as far as the public is concerned - but does that mean they're not worth putting your money in? In any troubled marketplace there are always stocks to be picked, but current political turbulence makes that an unusually tough challenge in the UK energy sector.

Much anger is currently directed at the 'big six' energy groups - Centrica, Scottish & Southern (SSE), Scottish Power, E. on, RWE and EDF - and their pricing power in the domestic market. The recent round of tariff rises, ahead of the winter heating season and in the face of a moderating wholesale market, served to underline the suggestion that they are price-gouging.

Labour leader Ed Miliband harnessed this discontent in his conference speech in Brighton in September with his vow of a two-year price freeze and abolition of the current regulator, Ofgem. In fact, by promising a freeze 18 months before a general election, he may actually have encouraged the big six to gold-plate tariffs now, in case the controls should become a reality.

Without the freedom to raise prices, they claim new investment plans would be postponed, as would plans to bring mothballed gas generation back on line. This is not an empty threat: former regulator Alistair Buchanan estimated last year that the big six would need to find �33 billion in new equipment over the next decade just to keep our lights on.

But Miliband had detonated a political explosion. Initially coalition ministers argued that competition among suppliers and fixed-price tariffs would ease pressure on energy users; and over the longer term, fracking and new nuclear would help meet the country's energy requirements. However, after the unhelpful intervention of former prime minister Sir John Major, who floated the idea of a windfall tax to subsidise poorer consumers, David Cameron was forced to respond. His answer was to bring forward proposals to lift some of the green taxes that have added �127 a year to the average energy bill.

None of this will be enough to prevent energy supplies running low in 2015-16, especially if Britain's recent growth renaissance continues. There is little margin for error in the nation's energy supplies. In March this year, after a long, cold winter and some difficulties in obtaining gas through North Sea pipelines, the volume of gas held in storage fell critically low, leaving the suppliers to dip into a volatile reserve to keep the central heating on and the hobs burning.

So the outlook is uncertain on several fronts - and the impact of the Miliband intervention so far is an across-the-board 10 per cent cut in the market value of the big energy suppliers, in which direct investment opportunities are in any case limited by high levels of overseas ownership. After privatisation in the 1990s, the first wave of foreign investors came from the United States. This group was frightened off in 1997 by Gordon Brown's windfall tax on utilities. The exit of the Americans created openings for European owners such as RWE and E. on from Germany, EDF from France and Iberdrola from Spain, which brought Scottish Power.

That left only SSE and Centrica as the main opportunities to invest in UK energy. …

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