Ofgem must show it is awake as energy sector faces winter nightmare | Nils Pratley
“We are in danger of just sleepwalking into an absolute massacre,” Keith Anderson, the chief executive of Scottish Power, said dramatically this week, referring to the number of energy suppliers that could go bust before next spring.
His prediction is credible because a critical ingredient in an energy price crisis, from the point of the view of retail suppliers, is how long it lasts. Customers’ fixed-price deals come to an end as time passes and new arrangements have to be made, backed by purchase agreements and hedging contracts.
Since regulator Ofgem’s default tariff – an average £1,277 for a dual-fuel household – is now the cheapest deal on the market, suppliers are locking in losses because they cannot buy energy that cheaply. Wholesale gas prices remain high throughout the winter.
Losses could be as much as £1,000 per customer, reckons Anderson, a level of financial pain that not all will withstand, even if Scottish Power will obviously be a survivor. Ofgem is next due to raise the cap next April, which is a long way off. Thus the danger clearly exists that the industry could shrink rapidly to the ugly oligopoly of old.
Anderson’s suggested remedies sound a non-starter for ministers. He would like the price cap adjusted once a quarter, rather than every six months; or he’d scrap it and introduce a wide-reaching social tariff to tackle fuel poverty. Neither fits with the current mantra from Kwasi Kwarteng, the business secretary, and Ofgem, that the cap must stay through the winter to “protect customers”.
But what’s the plan to deal with the radical alteration in the retail market that a cull of suppliers would imply? Let it happen? That’s possible. Ofgem can force suppliers to take on stranded customers, and nationalisation is the ultimate option for a failure of a big company. Meanwhile, the price cap, which is really a price-smoothing mechanism for customers, allows suppliers to recoup losses in later periods, even if that would mean higher energy bills until 2023.
Yet Ofgem keeps hinting it is working on something else. “We will need to regulate the energy market differently,” its chief executive, Jonathan Brearley, said in a speech this month that lacked detail and bite. He presumably means insisting that all suppliers are properly capitalised – Ofgem’s standards have been shockingly low, as we can now see. But there must be more to the thinking than that.
Therein lies the source of Anderson’s other grumble about fruitless meetings with government and Ofgem. “I’ve seen nothing about what new regulation might look like,” he says. “I’ve seen nothing about protecting vulnerable customers and the fuel poor.” The complaint is fair. This crisis has now been running for six weeks and the arithmetic of high gas prices, stretching into the middle distance, is relentless. Ofgem needs to show it is awake.
FirstGroup suffers nasty bite from Greyhound
Greyhound Lines, the US long-distance coach business, is the dog FirstGroup never wanted to own. It arrived as part of the $3.6bn acquisition in 2007 of US group Laidlaw, where the main attractions were the school buses and transit operations.
Greyhound was “a less obvious strategic fit with the rest of FirstGroup’s current business”, as it candidly admitted on day one. The answer was to sell the business quickly, even though it was 40% of Laidlaw’s revenues at the time, and dodge the growing threat from low-cost airlines.
Life did not work out so simply. The banking crisis and recession struck, puncturing hopes of a disposal. Now, 14 years later, a sale is finally happening. Unfortunately, the price to FlixMobility of Germany is just $172m (£125m), or a mere $46m on a cash-free, debt-free basis.
FirstGroup gets to keep $176m worth of properties, and says it has sold another $400m over the last 10 years, but that is small consolation. Greyhound’s revenues have shrunk from $1.24bn, as trumpeted in the 2007 announcement, to $423m, and operating profits last year were just $1.8m. That’s a lot of pain to endure when you planned to get off at the first stop.
Unilever price rises are not so terrifying
“Cost inflation remains at strongly elevated levels, and this will continue into next year,” said Unilever in its third-quarter update, catching the eye of inflation hawks. The accompanying charts told a tale of soaring input prices of everything from palm oil to US transportation costs.
Yet the picture is nuanced. Overall, Unilever pushed up its prices by 4.1% overall, which is a big move, but the sharpest rises were in Latin America and Asia. In Europe, the figure was 2.1%, which, from a local inflation perspective, doesn’t sound too terrifying.