Weekend press round-up: UK’s utilities and regulators are “not fit for purpose”. Meanwhile, the boss of oil giant Shell warns Europe could face years of energy rationing if Russia completely cuts off gas supplies and half of Tory voters support the nationalisation of energy according to a YouGov poll.
Utilities and regulators ‘not fit for purpose’, says UK government ex-adviser
Britain’s privatisation model for energy and water is “broken”, according to a former Conservative government adviser who has called for an overhaul of the sectors’ regulators.
Sir Dieter Helm, professor of economic policy at the University of Oxford, said that energy and water were “too essential to be treated like any other commodity, as some of the architects of the privatisation, liberalisation and competition paradigm believed”.
“It is not accidental that both the water and the energy privatisation models have run into serious trouble. After more than 30 years, neither is fit for purpose. Nor are their regulators,” he told the Financial Times in an interview.
Speaking as an 80 per cent increase to the energy price cap triggered public outcry over soaring electricity bills last week, Helm said the watchdogs for energy, Ofgem, and water, Ofwat, should be replaced with new, wide-sweeping regulators that cover each entire system.
The comments also followed criticism over water companies pouring an unknown quantity of sewage into England’s rivers and seas, and implementing hosepipe bans while wasting water through leaks during a national drought.
Water and energy in the UK should be thoroughly overhauled “based on investment in the assets and the systems, not one based on financial engineering and short-term network price caps”, said Helm.
The energy and water sectors had become prone to “revolving doors and pork-barrel politics, heavily influenced by vested interests, with an interest in complexity, which is a lobbyist’s dream”, Helm said.
This had led to the “inevitable consequences of poor regulation and bad outcomes for customers”, he added. Since 2010, the government has gradually become the main purchaser of all electricity, Helm said, with almost all new generation coming with a state-backed contract or subsidy, which is the “polar opposite of what the architects of privatisation had in mind”.
Helm questioned the predominant narrative that high energy costs are solely the consequence of rising wholesale gas prices owing to the war against Ukraine. Despite not importing much gas directly from Russia, the UK has been among the hardest hit.
“Customers faced with high bills are paying too much because the government failed to reform the market,” said Helm, who wrote the 2017 Cost of Energy review for government.
In terms of solutions, he said the price of electricity should be tied to the cost of production, rather than always to the marginal cost of gas, which had enabled many renewable producers to make “supernormal profits” linked to the higher price of gas while their own costs “haven’t changed one iota”.
This was “every bit as much an unearned windfall as the oil and gas producers are getting”, he said.
Although the government should press ahead with added windfall taxes on renewable and nuclear energy generators, “you wouldn’t need this if you had a proper tax regime for the North Sea or an electricity market, which is priced on the basis of costs”, he said. Many of these measures are “sticking plasters on a failed model”, Helm added.
The UK will still need to rely on gas in the short term, he said, because of the intermittency of wind energy and the fact that new technologies such as battery storage will not be able to compensate for at least a decade. He added that wind power was also not necessarily the cheapest form of energy at present once the intermittency and network costs are added back in.
“Ofgem is not the right vehicle,” Helm said. “Energy needs system regulation, not an institutional muddle with Ofgem in overall charge.” On the water sector, the former government adviser called for a new system of regulation based on catchment areas, which would cover everything from flood management to water supplies, leakage and the protection of the environment.
This body would be in the public, not private sector, but be given independence and encouraged to put work out to competitive tender, as most water companies already subcontract labour. “If you did that I don’t really care whether they are nationalised or not,” Helm said.
The Financial Times
Energy could be rationed ‘for years’
Europe faces years of energy rationing without Russian gas, the boss of Shell has warned.
Ben van Beurden said it was a “fantasy” to think that Europe’s energy crisis would be resolved soon and he warned that if Moscow were to cut off all supplies, life would be “very hard”.
“I do not think this crisis is going to be limited to just one winter,” the chief executive of Europe’s biggest oil and gas group said yesterday.
Van Beurden said it “may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and through a very quick build-out of alternatives,” such as gas imports from elsewhere and developing non-gas energy sources.
“That this is going to somehow be easy, or over, is a fantasy we should put aside,” he told a press conference in Norway, according to Montel, an energy news site.
The comments are among the bleakest yet from the Shell chief, who has warned repeatedly of a “really tough” winter and of the potential for rationing if all gas was cut off by Russia, which normally provides about 40 per cent of European supplies.
EU leaders have drawn up plans to voluntarily curtail gas usage by 15 per cent, with the potential for rationing to become mandatory in an emergency. Britain has done little to encourage lower consumption, beyond leaving consumers exposed to soaring prices that will leave many unable to afford their normal energy usage.
Wholesale gas prices have hit record highs across Europe and in Britain after Moscow reduced supplies down the Nord Stream pipeline to Germany to a fifth of normal levels, leaving Europe chasing other sources of gas. Gazprom, the Russian state gas group, has said that it will shut down the pipeline for three days from tomorrow for what it describes as maintenance reasons. Traders fear it will not reopen.
Gas prices for Britain for this winter closed on Friday at a record high of 827p per therm, more than 16 times higher than the average prices over the decade pre-crisis. Soaring wholesale gas and power prices have already fed through to record household bills, which are due to increase by 80 per cent to £3,549 a year from October.
Half of Tory voters want energy to be nationalised
Nearly half of Conservative voters support the renationalisation of Britain’s energy industry, a poll has found, putting pressure on the incoming prime minister to embrace radical solutions to the cost of living crisis.
Forty-seven per cent of Tory voters favour returning the energy companies to public ownership, with 28 per cent opposed to such a move and 25 per cent unsure. Among those who voted for the Conservatives in 2019, including many in the red wall seats of the northeast and the Midlands, the figure rises to 53 per cent in favour of renationalisation.
The figures, from a YouGov poll conducted for The Times, provide a stark illustration of the choices facing squeezed households after it was announced that energy bills will rise to an average of £3,549 a year from October. Economists and energy experts urged the government to take action to avoid widespread blackouts this winter.
Lord Darling of Roulanish, who was chancellor under Gordon Brown, said that Britain could enter a “lethal” recession without immediate support for households and that nationalisation should be considered.
Darling oversaw the government’s response to the 2008 financial crisis. He said that people were already cutting their spending and told the two candidates in the Conservative leadership contest to stop “fiddling around with small measures”.
“You need something significant and substantial, and you need it now, because people’s bills are going to start coming in a few weeks’ time,” he told BBC Radio 4. “If you don’t do that then you have the risk that the economy will slip into recession with all that entails.
“When you’ve got that, on top of the fact that you’ve got inflation already at very, very high levels we haven’t seen since the Seventies, this is a lethal cocktail, which is why it needs bold action taken by the government now, not fiddling around with small measures.”
Asked what measures he would take, Darling suggested that he favoured Labour’s policy of freezing the energy price cap but said renationalisation should be considered. “Nationalising companies that are largely profitable — but you can ask yourself how they became so profitable — I think just at the moment there may be a case for it, but that would not be my first priority,” he said.
More than half the voters questioned by YouGov said they would have to turn down their thermostat or limit the time their heating was on over the coming months. Twenty-one per cent said they would not be able to heat their home “except on a very limited basis”, and 5 per cent did not believe they could heat their home at all.
Almost half said they would not be able to afford their energy bills without cutting other expenditure. A quarter said they would not be able to afford heating even if they reduced their spending elsewhere.
The poll, conducted on Tuesday and Wednesday last week, also suggests that Liz Truss would find it difficult to convince voters that she was best-placed to handle the energy crisis. Truss, the frontrunner in the race to be Conservative Party leader, said she would not make an announcement on her package of support until after the contest ends in a week.
Thirteen per cent of voters have faith in Truss to bring down inflation, compared with 70 per cent who do not trust her. By comparison, 31 per cent trust Sir Keir Starmer, the Labour leader, and 21 per cent trust Rishi Sunak, Truss’s rival for the Tory leadership.
Labour’s £29 billion plan to cancel the rise in the energy price cap is supported by 51 per cent of voters, with 17 per cent opposing the move, the polling shows. Labour has an eight-point lead over the Conservatives, with a vote share of 39 per cent.
Margaret Thatcher privatised the energy industry over the course of the late 1980s and early 1990s. British Gas was privatised in 1986 and the electricity sector was sold off in 1990 when the 12 regional distributors were privatised.
The same year the Central Electricity Generating Board was broken up into four companies. PowerGen, National Power and Nuclear Electric were dedicated to the generation of electricity and the National Grid was responsible for transmission. The renationalisation of the utilities formed a core part of Labour’s manifesto under Jeremy Corbyn in 2019. At the time, the CBI estimated that such a move could cost the taxpayer at least £196 billion — although this figure was subsequently disputed.
The YouGov poll found a large public appetite for radical policies to combat the energy crisis. Sixty-one per cent of respondents supported bringing the energy companies into public ownership. Overall, 45 per cent believed that renationalisation would lower energy bills, 27 per cent thought they would remain much the same and 7 per cent believed they would rise.
Closure of coal power station set to be delayed to prevent UK blackouts
The effort to prevent electricity blackouts this winter is expected to delay the closure of part of a coal-fired power station in Nottinghamshire, with the plant’s German owner nearing agreement with the UK authorities.
In the third in a series of deals to have more coal power on standby if needed, National Grid’s electricity system operator (NGESO) is working towards finalising an agreement with Uniper to keep all of the operations at the Ratcliffe-on-Soar site open through the winter.
In May, the business secretary, Kwasi Kwarteng, wrote to NGESO asking executives to work with Uniper and fellow owners of coal-power stations Drax and EDF to slow their closure plans after Russia’s invasion of Ukraine shook the energy markets.
Uniper had been due to decommission one of its 500-megawatt units at the Nottinghamshire plant at the end of September, two years before closing the remaining three units at the site.
Under the deal, NGESO is expected to pay the company a fee to delay the decommissioning so all three units can be called on if needed. Uniper will also be compensated for costs incurred, including coal purchases, with any additional charges eventually being fed through to consumers’ energy bills.
The UK government has committed to ending the use of coal power in Great Britain by October 2024, a year earlier than originally planned. But that target is now at risk as ministers and power operators race to ensure security of supply.
Deals with Drax and EDF to extend the life of two units each from October to the end of March have already been agreed.
Drax, which operates a power plant in Yorkshire, said it had agreed to source up to 400,000 tonnes of additional coal, which with current stocks is enough to produce 1 terawatt of electricity. The plant will only operatewhen instructed to do so by National Grid.
EDF agreed in June to extend the life of its West Burton A coal plant in Nottinghamshire by six months. It is retaining 200 workers to ensure 400 MW is available as and when needed from one unit, with a second unit as backup.
NGESO said this month that it expected the “upfront cost” of the series of deals to be “£220m to £420m, subject to the procurement and use of the coal”.
Liz Truss allowed farmers to pollute England’s rivers after ‘slashing red tape’.
Liz Truss is responsible for farmers being allowed to dump a catastrophic “chemical cocktail” of pollutants into Britain’s rivers, according to environmental campaigners. This has meant agricultural waste now outstrips sewage as the leading danger to England’s waterways.
Truss boasted of cutting farm inspections in a parliamentary exchange in 2015 when she was environment secretary. This allowed farmers to dump waste, including pesticides and animal faeces, into rivers.
“We have seen a reduction of 34,000 farm inspections a year and an 80% reduction in red tape from Defra [Department for Environment, Food and Rural Affairs]. That is vital for our £100bn food and farming industry,” Truss, who held the environment post from 2014 to 2016, told parliament.
“A future Conservative government would continue to bear down on red tape. We are considering pilots for landowners and farmers to manage watercourses themselves, to get rid of a lot of bureaucracy.”
Because of cuts to the Environment Agency and Truss’s policy of trimming official rules and inspections, farmers were able to dump waste in their local watercourses without much fear of being caught and fined. Campaigners say this has had dire consequences for England’s rivers.
For example, in the Wye valley, home to one of Europe’s largest concentrations of intensive livestock production, Lancaster University found there were 3,000 tonnes of excess phosphorus caused by agriculture seeping into the valley’s waterways.
Other rivers polluted by agriculture include the Axe, which flows through Dorset, Somerset and Devon, the Derwent in Yorkshire, the Ehen in Cumbria, and the Test and Itchen rivers in Hampshire.
Louisa Casson, head of food and forests at Greenpeace UK, said: “Letting industrial farms unleash a chemical cocktail into our rivers and get away with it has been catastrophic for our environment. Liz Truss’s crusade against red tape has been a key contributor and, ultimately, our wildlife and the public have been left wading through the resulting filth in the rivers they cherish.”
Tories rush to drill for more oil in North Sea
Liz Truss will approve a series of oil and gas drilling licences in the North Sea in one of her first acts as prime minister as part of a long-term plan to ensure Britain’s energy security.
Senior allies of the Tory leadership frontrunner have been putting together her response to the energy crisis, with average annual household bills due to rise to £3,549 from October.
Kwasi Kwarteng, the business secretary, and Jacob Rees-Mogg, the Brexit opportunities minister, have been meeting oil and gas companies to negotiate a deal to secure energy supplies this winter. The pair have a two-pronged approach that involves securing more gas from Norway while maximising domestic production.
There is a scramble across Europe for dwindling supplies. Ursula von der Leyen, president of the European Commission, said yesterday that the bloc was preparing to reform the continent’s electricity market.
Kwarteng, who is likely to be made chancellor if Truss becomes prime minister, has led the drive over the past year to increase North Sea drilling. Rees-Mogg is being tipped for the position of business secretary after he was entrusted with helping to develop Truss’s policy on energy. Rees-Mogg held another meeting yesterday with senior executives at Total and Shell.
The North Sea still contains gas and oil equivalent to about 15 billion barrels, according to the latest estimates from Offshore Energies UK, based on figures from the North Sea Transition Authority. Britain’s total energy consumption equates to about a billion barrels of oil a year.
Truss has faced criticism for delaying her announcement on energy until after the leadership election. “Rest assured there is a lot of work going on behind the scenes,” one ally said.
If she wins, as expected, Truss will invite applications for drilling licences to explore new fields, The Times understands. As many as 130 licences will be issued, insiders believe. The last time the government began a licensing round was in 2019, which resulted in the award of 113 licences.
The exploration licences are unlikely to bring prices down in the immediate future and green campaigners argue that the oil and gas produced in Britain will be sold on the global market, offering little benefit to domestic consumers. In February the independent Climate Change Committee sent a letter to Kwarteng, saying that there should be a “presumption against exploration”. Since then Britain has experienced a temperature of 40C for the first time.
In addition to pushing forward with the new licensing round, a Truss government would encourage oil and gas companies to invest in their existing sites to maximise production.
When the government announced a windfall tax on the profits of oil and gas companies this year, it included an 80 per cent allowance to boost investment in North Sea extraction. The industry is lobbying against further taxes as a condition for increasing production.
North Sea oil and gas production peaked in the early 2000s when just under three million barrels of oil were extracted each day. That figure has fallen to under a million, although there have been signs of an increase.
In the first six months of the year, British oil and gas production increased by 26 per cent, enough to heat 3.5 million homes a year, according to Offshore Energies UK.
After talks with Kwarteng, Perenco, an Anglo-French company, has planned five new bore holes for next year and is repairing existing wells. BP is also to remediate 29 wells next year. TotalEnergies, a French company, is hoping to increase production by 9 per cent at the biggest gas field in Britain.
Kwarteng had hoped to fast-track plans to develop six untapped fields in the North Sea, some of which had secured government approval decades before. An application from Shell to extract gas from the Jackdaw site received the go-ahead, but is now entangled in a case brought by Greenpeace.
Kwarteng has vowed to fight the case in the courts. “We are ploughing on because there is an urgent need to increase domestic production in the North Sea,” a source said. “There is a huge incentive for the oil and gas companies to maximise production because prices are so high right now.”
If she is elected as Tory party leader, with the result of the contest announced on September 5, Truss is set to give the green light to a controversial project 80 miles off the West coast of Shetland. Equinor, the Norwegian state energy company, has submitted plans to extract 70,000 barrels of oil a day from the Rosebank field, which it claims will meet 8 per cent of British production by the end of the decade. She is likely to support plans, with drilling expected to begin in 2025.
Boris Johnson will spend his final week in No 10 attempting to secure his legacy and is expected to talk about his achievements in boosting nuclear and wind power. There are signs, however, that voters expect a bolder intervention over energy bills after weeks of inaction during the Tory leadership contest.
A YouGov poll for The Times indicated that nearly half of Tory voters backed the renationalisation of the energy industry, with one in four people saying they could not heat their homes this winter.
Invest billions to halt sewage spills, water companies told
Water companies will be required to invest more than £2 billion a year for the next 25 years to drastically cut sewage discharge, under what the government described as the strictest targets ever imposed on the industry.
George Eustice, the environment secretary, said that the intention was to “end the environmental damage caused by sewage spills”. Campaigners said, though, that it was unacceptable the programme would take so long. The plans will still allow discharges when there is “unusually heavy rain”.
The targets were introduced in response to public anger about sewage discharge around bathing sites. Water companies in England discharged sewage 400,000 times in 2020, and untreated sewage was released at holiday sites along the south coast this week.
According to the plans, which the government said would amount to the largest environmental infrastructure investment yet, water companies will be expected to pay £56 billion. By 2035 they will need to have improved all storm overflows next to designated bathing sites, with the rest following by 2050. “This is the first government to take action to end the environmental damage caused by sewage spills,” Eustice said. “We will require water companies to protect everyone who uses our water for recreation, and ensure storm overflows pose no threat to the environment.”
Discharges happen because the sewage system is often combined with drains carrying rainfall. When there is too much rain and the drains fill, the overflows release the pressure. Particularly where the infrastructure is older, the system has failed to keep up with increased population as well as greater surface run-off due to more concrete and tarmac. This puts the sewage network under increasing pressure, as has been seen after the storms of the past fortnight.
Residents and sea swimmers gathered yesterday in Hastings to protest against Southern Water, which discharged sewage at several places along the coast this week, including at St Leonards beach. Southern Water has come in for particular criticism from campaigners. Last year its chief executive received more than £1 million in salary and bonuses, even as the company was fined a record £90 million for sewage spills. Campaign groups including Surfers Against Sewage argue that the profits made by the companies despite continued sewage releases show they are not serious about cutting pollution.
Jim McMahon, the shadow environment secretary, said that the Labour Party wanted to see more details about how the plan would work. “This document is neither a plan, nor does it eliminate sewage dumping into our natural environment. Under the government’s weak improvement ‘target’, based on last year’s data, we’d face another 4.8 million sewage spill events in our country between now and 2035,” he said.
Swimmers take water tests into own hands
Members of the group have joined an effort to monitor E. coli in the river, which has an Anglian Water sewage treatment plant within a kilometre of a wild swimming spot.
Since April residents have conducted 155 tests, with 101 falling short of the E. coli standard for good coastal or inland bathing water. The bacterium causes illnesses such as urinary tract and intestinal infections, and the tests with the worst results were conducted, they say, near the treatment plant. Last week swimmers tested water at chest depth, where the risk of ingestion is highest.
The activists claim that the presence of E. coli is an indicator of “other pollutants going into the river”. In May the Environment Agency found that no rivers in Suffolk met targets for good water quality. “Our river not being safe never crossed our minds. It looks beautiful. You see birds on it and it is flowing so we assumed it was fine. It was just a complete shock and it justified our experience of the smell and seeing brown, oily, smelly scum originating from the direction of the sewage plant,” Leach, 60, said.
The testing was launched started by Eamonn O’Nolan, a Green Party councillor in Woodbridge , this year after he contacted the University of Suffolk amid reports of sewage in rivers.
The residents’ quest is to achieve transparency on when Anglian Water releases sewage into the river. “We have asked for real-time data, which Anglian Water is not prepared to give, so that we can know when they are releasing effluent. Then we can time our swims,” Leach said.
Residents also hope to have the river declared a designated bathing site, a status requiring the Environment Agency to test water weekly and publish the results.
UK electricity monopolies under scrutiny over network investment
The Leicester Square box office in the heart of London’s West End is not just a ticket booth. Push a red button at the back of the cabin and a hatch takes engineers down to the hub of the theatre district’s electricity network, powering everything from the Royal Opera House to the Trafalgar Square fountains and the parliamentary offices in Whitehall.
Despite the elaborate access, the substation is ageing and requires a £16mn upgrade from owner UK Power Networks, as the UK’s electricity infrastructure comes under pressure from the shift to green energy and recent blackouts highlight the need for modernisation.
But at a time when surging energy prices are turbocharging inflation and pushing countless households into energy poverty, the question of how much operators can raise from consumers to pay for such improvements is more controversial.
UKPN, owned by Hong Kong billionaire Li Ka-shing’s CK Infrastructure Holdings, is the biggest of six monopolies that run Britain’s pipes and wires, responsible for keeping electricity flowing to 8.3mn homes and businesses in the south-east and East Anglia.
As with its peers, any investment it makes into its network — from electricity pylons and cables to customer advice and service — is paid for by customers through a charge on household energy bills.
UK households currently pay an average of £372 for all the electricity and gas networks — or about 10 per cent of the new energy price cap from October that was announced by Ofgem on Friday. This includes the cost of suppliers that have collapsed.
The amount the monopolies can charge customers for network improvements is set by energy regulator Ofgem, which is currently in discussions with the industry over the price settlement for the next five years.
Colm Gibson, managing director at Berkeley Research Group, said Ofgem faced a “difficult task balancing the need for infrastructure investment with increases to bills but the current proposals appeared to place almost all the inflation risks on customers’ shoulders”.
UKPN, which says its £98 charge to customers this year is the lowest in the sector and that it has invested £6.4bn over the past 11 years, is one of many energy companies enjoying bumper returns on the back of soaring prices.
The company paid a £217mn dividend to its owner in the year to March 2022 after generating £1.8bn in turnover and £531mn in pre-tax profits. In June the sale of UKPN to a consortium led by Macquarie collapsed after CKI raised the asking price from an initial £15bn — despite having paid just £5.5bn when it bought the business from France’s EDF 12 years ago.
But as energy profits boom, concern has been raised over whether the broader sector is delivering the quality of infrastructure that is needed.
An Ofgem report into Storm Arwen, which left a trail of destruction in parts of Scotland and northern England in November, found that local electricity network providers had failed to carry out routine maintenance such as cutting trees. Between 50 and 75 per cent of poles damaged in the storm were more than 40 years old, suggesting a lack of investment had contributed to the blackouts.
“Planning for the capacity requirement now is more important than it has ever been,” said Dominic Quennell, chief executive of electricity cable company Enertechnos. “In coming years the issue is likely to be less about recovering quickly from storm damage but more about future demand.”
Many of the country’s cables were installed after the second world war, designed for a time when electricity demand was far lower than it is today. When more power is pushed through them they become less efficient, leaking capacity.
This year roughly 25 terawatt hours was lost, an amount sufficient to power 7mn homes and equivalent for the first time to all the electricity imported into the UK, according to data from the Department for Business Energy and Industrial Strategy.
“It’s analogous to the water companies, which have had a large period of under-investment and people are now seeing the consequences,” said Quennell “We have a chance to address this now in the electricity sector with better regulation.”