Conservatives turn to energy costs as price cap plans appear to soften

The Conservative party is expected to dilute the threat to energy suppliers with watered down plans to cap bills ahead of a fresh review into the rising cost of Britain’s electricity.

The Tory party said its ambition is for Britain’s energy costs to be the lowest in Europe, and its manifesto included plans to reignite the shale industry by offering a bigger slice of a sovereign wealth fund to those who welcome local drilling.

The impact for the industry may be much less than we fearedDeepa Venkateswaran, an analyst at Alliance Bernstein

“We want to make sure that the cost of energy in Britain is internationally competitive, both for businesses and households,” said the party.

The pledge made no mention of the £100 savings for 17 million customers promised by Theresa May earlier this month.

has energy price cap as expected but leaves significant wiggle room re: nature and scope of cap. £100 figure doesn’t feature.

A new addition to the Tory party manifesto is the pledge to tackle concerns over rising energy bills by putting in place a safeguard tariff cap for an unspecified number of consumers who are on the poorest value tariffs. The cap will also include bills paid by micro businesses.

“The manifesto wording was vague, as expected, but hints that the impact for the industry may be much less than we feared,” said Deepa Venkateswaran, an analyst at Alliance Bernstein.

Mrs May had promised a hardline, market-wide cap on all standard household energy tariffs but the party line appears to have softened the stance following fierce criticism that the move would stifle competition. The party has promised to maintain the competitive element of the retail energy market by supporting initiatives to make the switching process easier and more reliable.

Theresa May 
Conservative party leader Theresa May

“Alongside giving individuals greater control over their energy bills and protecting customers from unfair bills, we will help them to save energy,” the party added. Its energy efficiency drive would include a commitment to upgrading all fuel poor homes by 2030 and revising requirements for new homes too.

“An energy efficient home is a more affordable and healthy home,” the party said.

It came as a relief to the beleaguered energy industry which has lost hundreds of millions of pounds in market value since the price cap plans emerged. SSE shares rose 2.3pc to around £15 and Centrica climbed 4pc to £2.

Ms Venkateswaran said the manifesto suggests that the cap is not intended to save money on current bills but to prevent future unfair price hikes. On this basis the starting point for the Government cap would be the highest standard tariff in the market, rather than the average, and would sit just above current ‘reasonable prices’.

A Conservative spokesman said: “There has been absolutely no watering down of our plans to cap energy prices and to suggest otherwise is simply wrong.”

Meanwhile the long-held Tory support for shale gas is set to continue. The party dusted off plans first put forward by former Chancellor George Osborne in 2014 for a sovereign wealth fund. Under the latest plan it will pay shale revenue directly to individuals as well as for the benefit of the country at large.

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Reality Check: Why does Labour want to control National Grid?

The leaked version of the Labour Party manifesto commits to “take energy back into public ownership to deliver renewable energy, affordability for consumers, and democratic control”.

Part of that would involve “central government control of the natural monopolies of the transmission and distribution grids”.

Natural monopolies are businesses where there are no benefits to be had from competition.

They are usually areas where there is a lot of initial spending on infrastructure needed, such as train tracks or water pipes.

It does not mean there can only be one business serving the whole country, but it makes no sense to have companies competing to provide such services to consumers in a particular area.

It would be inefficient, for example, to have two taps in your sink offering water from different providers or two sockets in your wall with electricity from competing energy companies.

Being a natural monopoly gives businesses enormous market power, which means that they must be regulated.

Whether it is better to have such services provided by government or by private companies regulated by government is a matter of political opinion.

National Grid’s main business is moving electricity and gas round the country. This is known as transmission. The very last leg of the journey into people’s homes and businesses – known as distribution – is done by a number of different companies. National Grid does own a stake in Cadent Gas, a distribution firm, but most gas distribution and all electricity distribution is controlled by other firms.

The cost of transporting gas and electricity round the country accounts for 29% of the average dual-fuel (both gas and electricity) bill, according to Energy UK, up from 23% in 2010. But National Grid says its share of that – the transmission cost – is only 5% of the typical electricity bill, and 3% of a gas bill. The rest is distribution costs.

Owning the transmission and distribution network would give the government considerably more control as it attempted to deliver promises in the leaked manifesto to deliver renewable energy and affordability for consumers, including keeping the average dual fuel bill below £1,000 a year.

The leaked manifesto also pledges to ban fracking (the use of high pressure liquids to extract gas from rocks) and use carbon capture (stopping carbon dioxide from escaping with other waste gases) as it moves to cleaner fuels.

Control over the network might help with this, but the government via its regulator and planning decisions already has a big say over the future energy mix.

Just nationalising National Grid (which is worth about £38bn on the stock market at the moment) would not achieve what Labour is promising – it would give the government the company that owns the UK’s electricity and gas transmission (it might also leave the government owning National Grid’s energy business in the US).

The distribution part of the equation is a slew of other companies – for gas alone it would be SGN, Northern Gas Networks, Wales and West Utilities, as well as Cadent Gas.

But the leaked manifesto calls for control of these companies, which could possibly be achieved by buying stakes in these businesses rather than nationalising them.

BBC business editor Simon Jack says National Grid’s UK business is estimated to be worth about £25bn.

“A chunky purchase but one that could quite easily financed in that it makes enough money to repay the interest on any money borrowed to buy it.”

National Grid has a lot of shareholders.

It’s been listed on the London Stock Exchange since 1995.

Its shareholders, including 880,000 small shareholders, would be very upset if they didn’t get a good price from the government for their shares.

There are not many precedents for nationalisation of profitable companies in the UK – companies are usually nationalised when they are in financial difficulties – so it is not clear at this stage what the process would be.

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Energy price rises help drive UK inflation up to 2.7%

The rising cost of electricity contributed to inflation’s rise to 2.7% in April, its highest level in three and a half years.

Increases in the cost of clothing, car tax and air fares were also blamed by the Office for National Statistics for the rise in consumer price inflation (CPI) that exceeded City forecasts of 2.6%, and soared above the previous month’s figure of 2.3%.

With wages increasing by just 1.9%, the new inflation figure highlights the growing pressure on living standards and consumer spending.

The Bank of England predicted last week that inflation would peak at 2.7% in the summer. However, the ONS said producer output price inflation was above 3%, indicating that further rises in inflation could be expected.

Alan Clarke, an economist at Scotia Bank, said he expected further electricity and gas price rises and that an acceleration in food price rises would push CPI inflation to 3.25% in the autumn.

“We remain convinced that the market is underestimating the further upside for inflation from here,” he said.

Clarke argued that the retail prices index (RPI), which includes some housing costs, was already at 3.5% and would rise to 4.25% before the end of the year, putting extreme pressure on consumers to cut back spending on non-essential items.

The National Institute for Economic & Social Research (NIESR) forecast last week that British workers will see their disposable incomes shrinking this year as a result of rising inflation that will peak at 3.4%, while average wage rises are capped at only 2.7%.

Howard Archer, chief UK economist at IHS Global Insight, said rising inflation would put a further squeeze on real incomes and force Threadneedle Street to delay any move to raise interest rates.

“The Bank of England will most likely sit tight on interest rates through 2017 and 2018 – and very possibly well beyond.

“We suspect it will end up remaining tolerant on the inflation overshoot given likely limited UK growth and the prolonged, highly uncertain outlook that the UK economy will face as the government negotiates the exit from the EU,” he said.

The TUC general secretary, Frances O’Grady, said the government needed to protect workers from a slump in real wages.

“Working people are still £20 a week worse off, on average, than they were before the crash. That’s why living standards must be a key battleground at this election,” she said.

“All the parties need to explain how they’ll create better-paid jobs, especially in the parts of the UK that need them most.”

But Scott Bowman, UK economist at Capital Economics, was more optimistic that inflation would be held in check. He said many of the elements pushing up inflation were one-off factors and their effect would wane over the coming months.

“The sharp rise was mainly due to factors that, while they won’t be reversed, shouldn’t be repeated. Indeed, a large part of the rise in inflation reflected air fares reversing the previous month’s fall as a result of Easter shifting from March last year to April this year.

“What’s more, vehicle excise duty rates rose this April and tobacco and alcohol duty increased by more this year than they did last year,” he said.

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EDF to buy majority stake in onshore wind developer

EDF’s renewable arm has confirmed plans to buy a majority stake in an onshore wind power developer.

EDF Energies Nouvelles said it has reached a full and final agreement with the shareholders of FUTUREN to buy a 67.2% interest in the company.

FUTUREN has operations in France, Germany, Italy and Morocco and currently operates around 745MW of assets in those countries.

Antoine Cahuzac, EDF Group’s Senior Executive Vice President for Renewable Energy said: “The coherence between EDF Energies Nouvelles’ and FUTUREN’s activities will help to strengthen EDF Group’s major strategic goals in renewable energy.”

The deal remains subject to the approval of the German competition authority.

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Millions of EDF customers face second price rise this year

The government is under mounting pressure to take strong action on rising energy bills after one of the “big six” suppliers imposed its second price hike this year on 1.5 million customers.

The consumer group Which? urged Theresa May to step in if energy groups, which have made a series of tariff increases in 2017, do not help households circumvent the steepest increases.

EDF announced on Wednesday that customers on its dual fuel standard tariff – for accounts taking both electricity and gas – would pay 7.2% or £78 more a year from June. It follows an increase of 1.2% in March and will bring the average annual household bill under EDF to £1,160.

The move by the energy group, which is 85% French state owned, adds to the pressure on the prime minister to take action after she warned in March that the market was “manifestly not working for all consumers”.

Alex Neill, director of home products and services at Which?, said: “Millions are continuing to suffer due to a lack of competition in the energy market. If energy companies fail to properly engage with their customers to help them find better deals, then the government and the regulator must step in.”

Ofgem, the industry regulator, said the rise was “difficult to justify”.

A government spokesman said: “It’s another sign the market isn’t working, and we will shortly set out proposals to help energy consumers as part of the government’s Plan for Britain.” The government’s plans are expected to be published later this month.

EDF blamed the increase on rising wholesale energy costs and government policies that have to be paid for by consumer bills, which include schemes to alleviate fuel poverty and support low carbon power.

Of the big six energy companies – EDF, British Gas, E.ON, npower, ScottishPower and SSE – five have raised their prices in recent months, with only British Gas promising to freeze them until August.

The increases have fuelled calls for a price cap to help struggling bill payers, which has prompted warnings from energy bosses that such a move would hurt competition and consumers. The prime minister recently put suppliers on notice when she said she was planning to take action, though what form that will take is not yet clear

“Energy is not a luxury,” she told the Conservative spring conference in March. “It is a necessity of life. But it is clear to me – and to anyone who looks at it – that the market is not working as it should.”

Vincent de Rivaz, EDF’s chief executive, said: “I know that price rises are never welcome, but the industry is facing significant cost increases.”

On the prospect of imminent government intervention, he added: “We accept that the government, regulators and consumer groups have concerns about the way markets work for customers, particularly the energy market.”

Last month De Rivaz told an industry conference that he understood why May was considering stepping in. He said: “Don’t let the industry off the hook when it comes to delivering the long-term objective of a better market for all customers.”

Price comparison sites showed that EDF’s standard tariff was now more than £300 higher than the cheapest deal on the market, and had become one of the more expensive standard tariffs on offer. Customers on cheaper fixed deals are often stung when those contracts come to an end, because they default on to more expensive standard tariffs.

Mark Todd, co-founder of the switching site energyhelpline, said: “This second price rise from EDF is a total shock. If you are impacted you must switch to avoid this price rise.”

However, figures released on Wednesday showed the number of people switching to different suppliers is increasing only slowly, with 536,658 customers changing supplier in March compared with 420,014 a year earlier.

MPs said EDF’s move showed why the government needed to intervene. “The energy market is manifestly not working and the government needs to step in to protect the vast majority of consumers who find themselves on these standard tariffs,” said Conservative MP John Penrose, who has been lobbying for a relative price cap, whereby the most expensive deals are capped in relation to the cheapest ones.

EDF claimed it was softening the impact on customers by deferring the rise until the summer, when people use less energy.

The company also said wholesale prices were a third higher than a year ago. But this drew a sharp response from the industry watchdog, Ofgem, which said it had not seen a dramatic rise in wholesale prices since EDF’s last increase.

Dermot Nolan, the regulator’s chief executive, said: “Ofgem and the government are working on a raft of reforms to ensure fairer treatment for consumers and to make the market smarter and more competitive. Today’s announcement is further evidence of the need for change.”

Nolan told MPs in February that Ofgem had the power to impose a price cap on tariffs but only if directed to do so by the government.

Many analysts believe some sort of regulatory intervention by May’s government is now highly likely, with experts at Barclays saying it was “almost inevitable”. The main impact of a price cap would be to significantly dent the profit margin that suppliers make on each customer.

Last year the competition watchdog ended a lengthy inquiry into the industry by pulling back from plans for a temporary cap on bills, opting instead for measures to help customers switch to cheaper deals.

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ScottishPower chief Keith Anderson hits out at UK Government gas and electricity bill price cap plans

ScottishPower chief Keith Anderson has rounded on UK Government plans for a price cap on gas and electricity bills claiming it could harm competition.

Anderson said the Government should instead make the “bold move” to scrap standard variable tariffs (SVTs) and only use price caps as punishment for firms that fail to move customers on to better value fixed deals.

ScottishPower hiked its SVT raised last month, with electricity prices rising by 10.8 per cent and gas by 4.7 per cent.

Work and Pensions Secretary Damian Green confirmed last weekend the Government will cap energy prices if it wins the General Election in June.

Iain Conn, who heads British Gas parent Centrica, warned on Tuesday a price cap could turn his group into a loss-making business.

Anderson notes in ScottishPower’s first quarter update: “A potential price cap could harm competition, so the bold move by Government would be to set a deadline to abolish SVTs and get every customer on a fixed-price deal instead.”

He added: “The Government could impose a target that two out of three customers should be on a deal by the end of 2018, and all customers on a deal by the end of 2019 with SVT abolished once and for all.

“Any company that fails to meet these targets should have a price cap not only imposed but retained until all their customers are on deals.”

Anderson said customers need to ensure they switch providers regularly to get the best tariffs.

“Just as you insure your car every year and go to the market for the best deal for you, so every energy customer should engage with the market at least once a year to make sure they are on the best deal for them,” he said.

ScottishPower’s first quarter results show its retail supply business saw profits fall by £81m, which it blamed on higher costs and mild weather conditions at the start of the year.

The drop in retail supply earnings helped push total underlying earnings across UK generatio nand supply down 73 per cent to £47m.

ScottishPower said it managed to stem customer churn in Q1, with gas and electricity accounts edging up to 5.5 million from 5.4 million a year earlier as it focused on offering attractive fixed rate deals.

Spanish parent Iberdrola saw group net profits fall 4.7 per cent to €827.6m (£704.8m) in the first quarter.