Energy Markets Return to UK Political Agenda

The UK energy market is looming large in political debate, with a leaked draft of the Labour Party manifesto reportedly proposing the creation of a state-owned rival to challenge the Big Six retailers – E.ON and RWE Npower from Germany; Iberdrola's Scottish Power; French EDF Energy; and UK Centrica and Scottish & Southern.

The draft also aims for 60% of energy to be produced by renewables by 2030, compared with the 27% average set for the European Union as a whole.

The measures, which extend to other sectors that have at some point been under state control such as transport and the mail service, would be paid for by higher corporation and income tax, according to The Times in a May 11 report. It said Labour would not comment: the manifesto has not yet been approved and is to be debated before publication next week. 

The election is expected to see Conservative Party leader Theresa May significantly extend her lead in parliament. but she too has become involved in energy market oversight, reviving a plan mooted by the Labour Party – when it was in opposition under Ed Miliband – to cap energy prices. This was described as Marxist by the then prime minister David Cameron.

Labour leader, Jeremy Corbyn

(Credit: Labour Party)

No official probe – the latest, by the Competition and Markets Authority, ending last year – has so far managed to find any evidence of price fixing or collusion between the six companies, and recommendations for improving the retail market have stopped short of breaking up the vertical integration.

The press though has pointed out that retail prices have responded faster to upward price movements in the wholesale market than they have to downward price movements – "up like a rocket, down like a feather" – while the energy markets regulator Ofgem has published regular analysis of the retailers' likely margins, showing also the composition of household gas and electricity bills, including the levies and taxes to support renewable energy generation. Its regulation does not extend to Northern Ireland's market.

Price caps would hit suppliers hard: Moody's 

Ratings agency Moody's said that if the cuts, which May said would cut customers' standard variable tariffs – the commonest sort – by as much as £100/yr "would, if not offset by cost savings or large increases in the suppliers’cheaper tariffs, push the industry to losses and significantly reduce key credit metrics for the largest suppliers, Centrica and SSE. We estimate that around half of Centrica's customers, and up to three-quarters of SSE's, are on tariffs which would be subject to the proposed cap. Diversified European groups, including E.ON, Innogy, Iberdrola and Electricite de France would be less affected because of their geographic diversification and because fewer of their British residential customers are on SVTs.

Five of the six largest energy companies have recently reported details of their energy supply profits for 2016, said Moody's. The sixth, SSE, has a March year end. It estimates that these companies earned operating profits of only £47/gas and electricity customer, much less than the amount of the potential bill reduction, and Innogy’s nPower subsidiary and EDF Energy were already loss-making in 2016.

William Powell