The great UK energy debate – lost in translation?

Pretty much anyone reading this blog will be aware that there’s a massive debate going on in the UK as regards how much we should pay for our electricity and / or gas. If you’re not aware of the debate I can only assume you’re not in the UK or you live under a rock, because it’s been pretty much wall to wall coverage in every newspaper and TV / Radio news bulletin for the last month or so. Both sides are banging away at each other, but there really doesn’t seem to be much genuine dialogue or understanding between two pretty entrenched sides

Do we really understand the energy industry?

The narrative has so far been pretty solidly against the energy companies. That they’re nasty and mean; act as a cabal; can’t be trusted; consumers need more protection, and that because of all of the above, the UK doesn’t have a proper market.

I’m pretty sure if this goes on, Npower and E.On will be found to have sinister German historical connections, such as involvement in Sarajevo 1914 as part of an attempt to control European coal supplies or something. Don’t think the British firms will be allowed to get away from the rampant paranoia. Centrica and SSE and their predecessors will have done something wrong. Let’s not start with Scottish Power being used to funnel money that could fund independence to Franco’s heirs.

Ok, so I exaggerate for comedic effect, but I sometimes despair at the way complicated business issues are simplified to the point of being wrong, so that the story can have relevance to a wider audience. It’s the worst sort of patronising behaviour. “The proles won’t understand the real story, so this is what we’ll feed them”.

This happens not just across the media, which by its very nature is a short-term product (bar one or two exceptions with space to do proper analysis); but also in the political world, where Labour has just been exceptionally politically successful by bashing the electricity and gas industry, and by extension the current government. As ever with politics, this is, by its very nature a short-term attack designed to push wider public perception to Labour’s side when it comes to crossing the box. There will be another big thing in a few weeks, be it health, education, crime or inflation and all of this will be forgotten.

That neither side of Westminster has a coherent long-term energy policy, and that the UK has been hampered by a lack of any courageous strategy since privatisation (in of itself part of the problem as it was ideologically driven and therefore created a badly faulty market) makes me more frustrated with the current debate. Energy is, by its very nature a long-term business. Multibillion £ investment decisions will only drive returns years, maybe decades after the capital is assigned due to the inherent industrial realities of the trade. The industry does not fit well with our short-term political cycle. Politicians can make cheap capital on issues that they know will not be sorted until the next government, or one after. By that time, they’re either promoted, or in a better paid consultancy job.

I’ll stop slagging off the people I’m paid to attempt to influence now…

 

Defining the debate

At the heart of this, there are two pretty hefty questions:

1) What are energy companies for?

2) How much profit are they allowed to make?

Answering the first, there’s not just one answer. Any company that is not a nominated “Not For Profit” is designed to make money for its shareholders. Fiduciary Duty for Directors specifically sets out that their responsibility is to maximise the good of the business; to maximise revenues. This appears to upset a certain audience in this debate – that something so vital to basic human existence is in the hands of an organisation specifically designed to “put profit above all else.”

This is a pretty black and white view of a business. Energy companies, or at least those in this debate, are not capitalism red in tooth and claw. The genuinely do recognise (some more than others) their place in wider society. They understand that they are meeting a human need, not a want and must therefore be responsible when it comes to pricing and wider corporate behaviour. We’re not talking about private equity backed tech incubators that have no relevance to wider society. Or even private equity backed oil refineries.

Energy companies could make a lot more profit than they do now. If they showed the ruthlessness of the mining and metals sector, or wider commoditised industries (grain, sugar etc) we’d all be a lot power than we are now. I’m not saying that they’re perfect, or that they do this entirely voluntarily given the not insignificant government and cross border oversight, but the fact remains that the Big 6 clearly understand that there is a balance to be managed. between profitability and corporate responsibility. As a mate that advises one of the big 6 was quick to remind me, “UK consumers pay less than the vast majority of their European peers for both gas and electricity”.

We made a choice at privatisation that the UK government would not own assets, but would regulate the industry. This is the system we chose, and without fundamental reform – eg the creation of an EdF or E.On style sovereign backed national champion capable of working in liberalised markets – we have to accept it for what it is.

Energy companies therefore are here to make money by both facilitating commerce and keeping us warm and switched on. They are however expected to understand that the system we created allows them to make a profit, they do not have carte blanche. Their side of the bargain is to demonstrate they understand the bargain; embrace your powerful position in society and don’t take the piss. If one person dies because they couldn’t afford heat, it’s too many.

So what’s the real issue here – that these companies make massive profits? This is where I wish commentators had more of an understanding of how energy companies are structured and funded. The first thing to stress is that whilst the total profits can seem massive (because they are), these are not massively profitable businesses. There’s no significant difference in their profitability compared to supermarkets. If you want to make real money, quickly, in the energy industry go upstream, find some oil (like its easy) and sell the field to Shell.

The second thing is that the massive infrastructure investments that must be made in the UK to keep the lights on cannot be funded by cash profits. Put simply, EdF and its peers don’t make enough to build a new power station and ensure they can get the fuel in it to run properly, just by using cash. Major infrastructure projects must therefore be paid for by project finance (debt). The kicker here is that the interest rate on the debt will be based on how profitable a company is.

Therefore, if you want the lights to stay on and to keep warm this winter, we need the energy companies to remain profitable, and reasonably profitable at that. If the interest rates get too high, because the energy company isn’t profitable enough, there’s a few unpalatable options. Brownouts and cold nights, or one way or another it will be the consumer that pays; either through higher bills or taxation.

I’d also like to come back to the long-term nature of the industry. From the initial planning stage, to the decommissioning and clean-up of the site, an energy company has to shell out an awful lot of cash on its asset base – over the course of between 30-60 years. Of course there’s a (more or less) captive market for power and heat, but at the same time the asset base is not a constantly profitable machine. The long-term planning necessary, in addition to the inherent costs to running this sort of business means that when considering caps on profitability (as is the case in Ulster) the long-term life of the asset base has to be considered.

In other words, if we, the people and our elected representatives want to make sure we get the best deal on energy, both now and for the future, we need to speak the correct language; we need to understand how the industry works, so that there can be genuine dialogue, and therefore eventual agreement. Im not arguing for no regulation. I’m not arguing for fees to continue rising unabated. What I a saying isthat any  regulation should be based on a sound understanding of the industrial and capital realities of the industry. Any government needs to know how far the energy industry can be pushed before it walks away, or it runs the risk of being humiliated.

 

Energy needs to up its game as well

I have so far given the energy companies the benefit of the doubt. I’ve suggested the media and politicians need to understand the long-term dynamics inherent to the industry, and to stop focussing on the short-term negativity that has been so all persuasive. However there are improvements that could be made in both communications and operations that would better position the Big 6.

We have to consider operations first, as comms should always be a true representation of an organisation, and should never be used as a short-term smokescreen. Obviously each company is different. Centrica is a FTSE listed British / US focussed vertically integrated energy company with significant upstream resources. Three of the big 6 are UK units of state backed European giants that have virtually no upstream resources. It’s clearly difficult to come up with a template for companies that are genuinely different.

I would suggest that all of the big energy suppliers need to renew their covenant with the UK. Downstream energy utilities are different. Whilst they want to be branded “energy” companies because it sounds dynamic, the sexy stuff is done upstream and in petro chemicals units. Floating LNG, Hydrogen Sulphide that burns metal, ultra deep water exploration, specialist high octane fuels are all from a different part of the industry. Importantly they are all also about choice – whereas electricity and heating are basically human needs. It sometimes appears that the big domestic energy providers forget that they are entirely different to other businesses for two simple reasons. Their product keeps us alive and they effectively have a captive market, so they do not have to expend the energy to create a competitive position that is inherent to the business models of Sainsbury, Ford or Deutsche Bank.

If the energy industry doesn’t want to wake up one morning and find a UK government has decided to repeat the Standard Oil process of forced divestiture of asset base, the industry has to do a better job in explaining the way their business works for the benefit of UK society. This is an existential challenge. The potential for death is in play. If the reality of the situation is that there is excessive profiteering, the big 6 need to accept that under current market conditions, with such a slow recovery from a terrible recession, Government might force their hand. They might have to significantly change pricing and operational / accounting structure, and / or invest a significant slug of capital in convincing the UK that it is not being ripped off for the benefit of shareholders.

As a comms person, I’d suggest a long running campaign that considers the needs of all levels of society. This is about persuading the average person. As my boss says, “politicians are people too”. A few free ideas, some comms, some operational:

· Sponsor engineering and physics courses at school that will help educate a new generation about how the energy business works. This has worked very well in other parts of the world, particularly the post-soviet space.

· Offer special tariffs for the elderly and infirm. It won’t cost much and it will buy considerable good will

· Develop a set of collateral that can take all key stakeholders on a journey of how to build and run a power station – and how much it costs – show the massive investment in both capital and intellectual capacity that is deployed in the UK by the industry

· Demonstrate the value they give to the UK – keeping the power on providing employment, paying tax, energy security: the big 6 are all from friendly countries

· Intelligence: focus on the high tech side. Develop an understanding of how specialist the energy industry can be. Make it sexy – think Exxon adverts with swirling helixes. Make the energy industry somewhere we can be proud of

 

Conclusion: communication is worthless without mutual understanding

At the end however, there’s no magic bullets. Group CEOs of the big 6 need to commit to not just sounding responsible, but actually being responsible. This is when PR can be intelligently utilised. As someone who has worked for a number of organisations that have wanted to use PR as a diversion, I know that sooner or later, it just doesn’t work. At the same time, the other side need to consider the alternatives. There is a genuine danger of brownouts in the UK if the energy industry is pushed to the limit. To drive genuine dialogue, both side in this debate need to be prepared learn lessons from each other.

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