Fat-Cats yowl as their cream turns sour?

Fat-Cats yowl as their cream turns sour?

The UK energy industry hasn’t exactly covered itself in glory over 2021. Against perceptions of the industry’s multiple shortcomings, the recent comments by Keith Anderson, CEO of Scottish Power, reinforces the view that the UK energy industry is rapidly heading towards a full public enquiry into its operation, and even into the very foundations of its existence.

In a scathing attack, Mr Anderson alleges that:

  • Another 20 more small suppliers look set to fail as the current Price Cap is not truly cost-reflective, guaranteeing unsustainable losses;
  • The Price Cap itself mechanism needs to be abolished, or drastically reformed involving more frequent adjustments;
  • Removal of the Cap would not see profiteering, as a competitive market consisting of 10 or 15 well-run companies would provide good value for money;
  • Left unchecked, the retail energy markets could see the return of a ‘Big Six’, which is in no one’s interests;
  • There have been serious failures on the part of UK energy regulator Ofgem, not least of which was allowing the desire for more competition to blind it to the need to ensure the new market entrants were properly run and adequately financed;

Some may say that Mr Anderson’s comments are simply those of an industry ‘fat-cat' yowling because its cream has turned sour. In reality, his comments highlight some very real and fundamental flaws in the UK energy market’s design, regulation, and politics that need to be confronted. We’ll go further, and add that some of these flaws have been known about for decades. Some of the very obvious ones include:

  • A ‘free market’ in energy, or in any commodity, simply delivers an equilibrium price between buyers and seller – it does not guarantee that the equilibrium price will be popular among politicians or end-consumers.
  • The UK energy value chain is increasingly part of a global framework in which energy prices may not be set by, nor even influenced by, the UK itself. Unpalatably high energy prices in a national free market can be the inevitable consequence of rational overseas actors operating in a global free market.
  • The Darwinian nature of competitive electricity and gas markets favour the evolution of companies that integrate supply with generation and/or production, operating internationally and servicing millions of customers. As any MBA student will tell you, the ‘Big Six’ is simply a case study in ‘critical mass’, and is an inevitable survival strategy for companies operating in a free market in electricity and gas under UK and EU energy and competition law.
  • Encouraging competition by increasing the number of market participants does not necessarily guarantee that there will be increased competition, especially where end-consumers can’t see any clear cost benefit in exercising their right of choice between them.

It’s not yet clear how the UK energy market will emerge from the current global upheavals and address these flaws. A quick glance at the wholesale forward curves reveals that the current price ‘spike’ is increasingly the harbinger of a more general rise spanning years into the future, however politically unpalatable as that may be. Even if there is some miraculous return to ‘normal’ price levels, the fact remains that many small suppliers have folded, many more may follow, and the £5bn+ cost of rescue and restructure will ultimately be borne by the end-consumer. Confronted by the failure of competition, rising prices, financially crippled suppliers, and frozen pensioners, we believe that the government will feel forced to supplement its short-term measures by holding a public inquiry into its long-term policy options.

Under UK law, public inquiries are major investigations, convened by a government minister, and often granted special powers to compel testimony and submission of evidence.

The only justification required for a public inquiry is the existence of “public concern” about a particular event or set of events. Recent developments in the UK energy industry are certainly on a par with events that have triggered previous inquiries, and sure as hell are of ‘public concern’.

All inquiries address key questions such as, “What happened?”, “Why did it happen?”, “Who was to blame?”, and “What can be done to prevent this happening again?”. Answering some of these questions may prove embarrassing, especially if asking ‘What happened?” subsequently reveals that flaws in the market design and regulation had been known about for years beforehand.

The UK energy industry has few real political friends left. The centre and left have never been big fans of energy deregulation, and are becoming increasing vociferous about the need for change, even renationalisation. The political right, hugely embarrassed by the imminent sinking of their deregulation flagship, may attempt to rescue matters through a public inquiry and remedial action. There will be strong pressures from within the Conservative Party to reform energy, especially bearing in mind that its majority is built on ‘red wall’ seats whose constituents will be among the first to suffer from prolonged energy price rises. And all this is before the impacts of ‘Build Back Greener’ and the energy transition start to bite.

Our view is that Mr Anderson’s comments are the first public airing, or marker in the sand, for the kind of testimony to be given to a public enquiry by him and his peers. He won’t be alone – we expect the other energy companies’ CEOs to respond, rapidly followed by the executives of large energy users, the consumer groups, and eventually by the political left. Indeed, on Tuesday, Chris O’Shea, CEO of Centrica, addressed the issue of systemic risk in the energy industry in a meeting of the Industry and Regulators Committee at the House of Lords. At the same time, Sky News reported that a joint letter signed by number of small energy suppliers was sent to BEIS and Ofgem, alleging that Ofgem is “currently unfit to regulate an industry they have appeared to have a vested interest in or turning a blind eye to the market returning to a selective monopoly and a reduction in competition.” The letter also stated that Ofgem had adopted “a mantra of everything will be ok in the end, dumping the cost of their failings onto customers’ bills through mutualisation, decreased competition and innovation in the energy market and lack of preparation for the storm that has been brewing since the start of 2021”. Later this week, the Business Secretary has a roundtable scheduled with 40 small suppliers. For a minister with an at best tenuous grip on the workings of the UK energy industry, who would want to be in his shoes?

The solution is harder to foresee. The global energy supply chain clearly cannot be controlled to ensure cheap energy for the UK masses. Self-sufficiency through renewables may deliver energy and jobs (and votes), but not in the near-term. If Mr Anderson’s comments do trigger a wider call for a public inquiry and the role of Ofgem, he may have done us all a favour.

By Dr M F Earthey
27th October, 2021