So today was a major step in the development of the UK energy sector? Well maybe. OFGEM, the UK energy and gas regulator has stepped in and referred the industry to the Competition Commission. There’s been an awful lot of noise in the UK media, largely driven by the political persuasion of the newspaper or broadcaster in question.
What is certain is there’s an awful lot of spinning going on, which is quite fun to watch. I’ve got nothing to do with this as I advise a global energy player with limited exposure to the UK market, and no consumer interface at all. However my peers in the industry are working very hard.
So what are the major arguments?
There has been the accusation of excessive profits made by the “Big 6” power and gas firms that are the result of an essentially anticompetitive industry that has the consumer over a barrel. The argument is that power and gas are human needs, not wants, and that as the energy industry does not allow competition that might offer lower prices to consumers, there should be an official enquiry. The logical conclusion to this accusation is to follow the water industry, restrict pricing to ensure a certain level of profitability and make sure income is reinvested to guarantee a secure supply.
The counter to this argument is that private businesses are meant to be profit focussed, and that the energy industry demands multi £bn investment that can only be guaranteed by profitable businesses, especially in the post 2008 financing environment. The logical conclusion to this argument is that restricted profitability will also restrict capital investment, thereby putting the UK at risk of brownouts as there will not be enough generation capacity (let alone gas) as new power stations will not have been built to replace our creaking infrastructure.
The sides are set for battle. Consumer champions vs protectors of the free market. This is normally where I’d put my view on where there’s a middle ground that a smart PR chap might suggest to his client. However, now is not the time for the conciliatory voice from the side.
After years of fighting against the Big 6, there is a wide and diverse group that has blood in their nostrils and believes their enemy on the run. They point out the enormous salaries of energy execs and suggest that unlike a forex trader, they can’t simply move to Zurich. Morality is a very comfortable speaker podium (so I’m told. I’m an ex investment banking emerging markets energy specialist). They’ve got the enemy where they want them. The first (leading) question on Question Time sums it up perfectly “Is energy too important to be left to the market?”
The big energy beasts recognise the challenge. Their response has been pretty unsubtle. No fencing, no skirmishing. This has been a straightforward attack with heavy weapons. They threaten blackouts. They blame weak policy objectives. The non British owned firms threaten an exit. These are extremely large companies that are extremely sure of their position, and their value to UK plc. Although there may be some manoeuvring in the future, they have laid out their position in a very straightforward way. They do not believe that the industry needs fundamental reform as significant reform will not allow them to generate the profits necessary to raise the capital that will be reinvested into replacing capacity.
This is heavy stuff. My peers in the industry are sharpening their knives, getting the best brains on strategy and messaging and working on the most hard hitting campaigns to drive perception.
There will be creativity, there will be risks taken. It will be a game, and a fun one. I’d love to be involved, but instead, I’m standing on the sidelines as a very interested observer. I have to admit that I hope my client does not become involved in anything other than a tangential way. It’s been a busy enough few months as it is.
I’ll conclude by saying that this is just the first day of the conflict. Wars have been won on the first day, but this looks like being a long campaign. There has been no breakthrough on the first day. During this 100 anniversary of the Great War, I think its fair to say that trenches are being dug as both sides prepare for a long campaign.