2018 Progress Report to Parliament Confirming It Will Launch a Progress
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Tom Crisp Editor 01603 542130 [email protected] ENERGY PERSPECTIVE 02 Monday 15/10 – The government’s Green GB Week launches, SSE-npower faces double celebrating 10 years of the Climate Change Act 2008. The challenge of integration and government publishes a request to the Committee on Climate Change regulation – Robert Buckley seeking advice on the best way to meet a net zero emissions goal. POLICY 05 BEIS also publishes its response to the Committee on Climate Change 2018 Progress Report to Parliament confirming it will launch a Green GB Week sees spate of consultation ahead of the fourth Contracts for Difference allocation low-carbon initiatives Government responds to CCC’s round in 2021 to further “refine” renewables policy. Usio Energy, which 2018 progress report has around 7,000 domestic customers, ceases trading, with Ofgem EU energy law would no longer starting the supplier of last resort process. apply in a no deal Brexit: BEIS Industry calls for Budget to Tuesday 16/10 – At Energy UK’s annual conference, Energy and Clean address consumer costs Growth Minister Claire Perry launches an energy data taskforce. The Parliamentary update – Week 42 BEIS Heat Network Investment Project Main Scheme is launched. 30 2018 of the UK’s largest companies commit to fresh action to address REGULATION 11 climate change, including HSBC pledging a £250mn investment in Ofgem’s State of the Market solar parks and windfarms and Amazon deploying up to 20MW of 2018 report: improving but could large-scale rooftop solar. The government and Ofgem publish a do better progress report on the Smart Systems and Flexibility Plan, with about More detail on Retail Energy half the actions completed so far. ScottishPower’s pumped storage, Code revealed hydro and gas-fired generation is acquired by Drax in a deal worth INDUSTRY STRUCTURE 15 £702mn. Drax acquire 2.6GW portfolio Wednesday 17/10 – BEIS announces it will publish a Green Finance from Scottish Power Strategy in the spring. Three of the UK’s largest generators write to the City reacts well to Drax deal – Peter Atherton Chancellor to urge him to maintain a strong and stable carbon price in Green Investment Group shifts the upcoming Budget. Cornwall Insight holds an event discussing the focus post-privatisation gap between current deployment levels of renewables and what must NUTWOOD 20 be delivered to meet decarbonisation goals. PPM tariff cap is causing Thursday 18/10 – Research from the University of East Anglia and the suppliers to cluster around it – UK Energy Research Centre finds that low-income households are Professor Stephen Littlechild spending over 15% of their income on energy bills, whereas high- MARKETS 22 income households are spending less than 7%. Foresight Solar Fund raises £58mn through a share placement to fund the purchase of a portfolio of operational photovoltaic assets in the UK with an installed capacity of over 80MW. Friday 19/10 – The BEIS Committee calls for the government’s 2040 target for the end of petrol and diesel car sales to be brought forward to 2032. The National Audit Office calls on the government to increase transparency of the Household Energy Efficiency programme. Energy Spectrum 639 | 22/10/2018 | page 1 The Competition and after the decision they would be “watching closely Markets Authority (CMA) to make sure that hard-pressed households don’t recently gave its consent, face even more expensive energy bills this winter without conditions, to the as a result of this decision”. proposed merger between Labour’s reaction centred on the potential impact SSE’s domestic supply on employment. Shadow BEIS Secretary Rebecca business and the entire Long Bailey said: “Labour is […] concerned that the supply business of npower. merger should not lead to job losses at either It found that the deal “may Robert Buckley company. Providing high levels of customer not be expected to result in Head of Retail and service and supplying secure, green energy Relationship Development a substantial lessening of requires investment in skills – not prioritising 01603 542133 competition in the supply r.buckley@cornwall- shareholder dividends.” insight.com of electricity to domestic customers in GB and the Meanwhile the City has appeared comfortable that supply of gas to domestic customers in GB”. the merged company can cut costs and enjoy systems and other synergy benefits. Indeed the In this Energy Perspective we consider some of merger will see the formation of the second- the challenges the new company will face. These biggest domestic energy supplier (see Figure 1). Its include threats from CMA’s other interventions into senior leadership is taking shape, with designate the industry arising from the 2016 sector appointments made on 27 July for positions investigation, and of course the significant including CCO, COO and Business to Business broadening of price caps with the default price Director Designate, with Martin Read confirmed as cap. Chairman Designate in September. Its two Romeo and Juliet shareholders are clear in the priorities they have for it now that neither are reporting them as part of The long-awaited, or feared, consolidation of the their continuing businesses. Big Six into the “Famous” Five has so far failed to trigger much reaction, and what there has been On the deal being cleared, Chief Operating Office has not really focussed on competition effects. Retail of innogy Martin Herrmann spoke of “a further step in setting up this new company which Any concerns about reduced competition and will combine the best of what both retail detriment to disengaged customers in response to businesses have to offer and build a better the decision were expressed by a few smaller company for customers”. suppliers and intermediaries, characterised as having their own agendas to push. Which? stated Similarly. Chief Executive of SSE Alistair Phillips- Davies said: “We’ve always believed that the Figure 1: Domestic energy market shares Q417 and Q318 creation of a new, independent energy and services retailer has potential to deliver real benefits for customers and the market as a whole.” Sapphire and Steel Combining the two domestic supply businesses on to one npower-led IT system is seen as one of the major benefits of the transaction. Ahead of the deal SSE pulled the plug on its own IT project writing off over £300mn in the process, although npower’s travails in introducing the new system have led to customer service problems and action from the regulator. In 2015 npower was compelled to pay £26mn over billing issues affecting over 500,000 customers between September 2013 and December 2014. The success with which that system is embedded will be one, if not the key driver, of the long-term Source: Cornwall Insight health of the new company. And it will have to be Energy Spectrum 639 | 22/10/2018 | page 2 f undertaken speedily without any consumer highest cost to serve, but the lowest proportion of detriment. customers on fixed deals. As Figure 1 shows, even in the 11-month lifetime of The City thinks the new company has a lot to go the merger proposal, there has been attrition in the for in synergies. Bank of America recently combined domestic customer base of npower and highlighted its view that the new number two SSE (some 7%). The pressure will be on domestic energy retailer could target operating management to make progress quickly. If costs savings of “possibly over £300mn”. “We synergies either fail to come through or mean reiterate our view that there is an excellent tough decisions to cut staff, a political and media strategic fit, and that potential for synergies could backlash will also have to be navigated that could be significant […], yet the businesses are ripple through into further customer losses. homogenous and operational overlap is likely to be substantial,” the analyst added. Little and Large If it were to succeed and hold customer numbers The new entity also faces a struggle in getting steady, we estimate that the merged company costs to levels that will allow it to compete with the would bring its costs down to £75 or so per dual disruptors. Even if the systems integration fuel account, in line with the figures recorded by progresses in line with expectation, costs have EDF Energy and Scottish Power. This is positive been steadily rising for all the Big Six, according to but not, of course, as low as some entrant rivals the segmental accounts. claim they can deliver. Average indirect costs have risen across the group from £75 to £95 per dual fuel account since Figure 2: Supplier indirect costs (£) and customers (%) on active fixed 2011. Much of that increase has occurred since tariffs 2014 when attrition to the small and medium suppliers began to accelerate, indicating that scale has some bearing on costs to serve. However, the average for all six companies does not tell the whole story. The companies have performed to a range of costs. In 2017, EDF Energy’s and Scottish Power’s costs were under £80/ customer, with British Gas and E.ON UK near £95. Of the two merging companies, npower’s cost was the highest of all six at £115, while SSE weighed in a £91. But, given that two of the three smallest of the Big Six have the lowest indirect costs, this position suggests that there is more going on than sheer numbers. Source: Cornwall Insight EDF Energy and Scottish Power have also done Shaggy and Scooby the most of the Big Six to shift their SVT customers Significant challenges will continue to persist given away from default tariffs with 49% and 54% of their the new regulatory preference to intervene.