Blog > Energy Fixes: Be Careful What You Wish For
04
Nov

Written by Sophia Tickell 4/11/13

The spirit of Halloween has taken firm hold and politicians from all parties are competing to outdo one another on who is best at hating the wicked utility companies. The concerns they tap are real. Vulnerable people are genuinely frightened that they will have to choose between food and fuel, and memories of prolonged cold in recent winters are grim. The energy market does needs to be more competitive, innovative new providers do need support to enter the market and utility firms do need to be held under intense scrutiny on pricing.

Everyone loves a baddie, but the vilification of the Big Six – however merited – runs the risk of drowning out the second strand of the conversation that needs to happen. How are we going to reshape our energy consumption to mitigate and adapt to climate change? What are the global trends shaping energy demand, where do we want our power to come from, what is the best way to use energy for power, industry, transport and buildings, and what are consumers and citizens likely to want in future?

The UK’s aging energy infrastructure, much of which was built in the 1960s and 1970s, urgently needs replenishing. In addition, due to the low starting level of renewable energy (just 6% in 2009), more capital investment than any other European country is required to meet government imposed environmental targets. The government has chosen to rely on market forces to provide the investment this requires, except in the case of nuclear, where this has been shown to be unviable without government underwriting. In contrast with the German government’s ambitious and long-term Energiewende plan to transform the country’s energy mix away from fossil fuels and nuclear towards renewables – UK energy policy under myriad governments has been woefully incoherent – and not without consequences.

As the new Meteos report “Systems not Silos: Investor Perspectives on the Energy System” shows, utilities are part of a bigger global energy system affected by other parts of it. The double whammy of unpredictable policy and negative moves in the commodity cycle – in the UK and elsewhere – has led to dramatic value destruction of the European utilities and a crisis of the sector’s business model. European energy utilities have seen a significant fall in demand. This is driven by a secular trend towards greater efficiency, spurred by the EU’s Energy Efficiency Directive, as well as a cyclical knock-on from austerity and depressed economic growth. Public policy has also played a role in the form of the heavy subsidy of renewables, e.g. of solar in Germany, which hit the most profitable part of the utilities’ business. A third contributor was their own poor capital allocation and overleveraged balance sheets, resulting in part from a failure to anticipate the impact the shale gas revolution would have on wholesale prices. Dramatic price falls destroyed the economics of the heavy investments that the companies had made. The result has seen a sharp fall in valuations not only for utilities, but also for energy efficiency and service providers.

These woes go some way to explain why the Big Six are putting up consumer prices. They urgently need to persuade investors that recent value destruction in the sector does not denote the beginning of a “utility death spiral”. This broad move by consumers to disconnect from their utility could leave fewer customers left to finance an expensive infrastructure. This in turn drives up utility prices, leading to more customers leaving their utility, and so on. Raising prices to solve this problem may prove to have been a catastrophic misjudgement, triggering the very events they are designed to avoid. Consumers are understandably frightened and angry, and governments are unreliable allies when votes are at stake. But it is to them that we must look for coherent and long-term energy policy that addresses climate change at the same time as guaranteeing that we are snug and warm on future Halloween nights.