Competition will survive in the retail energy market and there will be no return to the “cosy oligopoly” of the past, said Kwasi Kwarteng, attempting to take the long view of the current gas crisis.
Fair enough, but the business secretary rather ignored two points. First, if mass failures of small suppliers beckon, the cost of persuading larger companies to take on customers could quickly become very large.
There is currently a shortfall of £200 between the energy price cap and the cost of supplying customers, analysts calculate. In those circumstances, the acquiring supplier will surely want more than a state-backed loan as an incentive to pick up the pieces. What it will demand is a bung, however it is dressed up in political language, to cover trading losses until the price cap is increased or “normal” gas prices return.
Second, it’s time to question whether small, fragile companies that can be blown off course by a sudden price spike are really adding much competitive bite. There were 70 retail suppliers at the start of this year and, as we’re seeing, not all can be described as resilient. The question for Ofgem, the regulator, is why it didn’t insist on higher capital buffers and solid hedging arrangements in energy-purchasing deals. Thresholds were raised about a year ago, but not soon enough.
The “big six” of old was indeed an oligopoly and the rise of challengers such as Octopus has undoubtedly improved choice and efficiency. But 12 well-capitalised companies – robust and able to cope with market shocks – might suffice. The current scramble to protect consumers looks chaotic.
Breaking up SSE would be a major U-turn
SSE’s statement wasn’t quite definitive. “There has been no decision to break up the SSE Group” does not preclude a decision being taken in future to demerge the renewables division from the Scottish electricity transmission network, which seems to be what the US activist hedge fund Elliott wants. For example, the board could jump in time for the strategy update in November.
But, while leaving the door slightly ajar, it would be also a major U-turn for its chief executive, Alistair Phillips-Davies, to change the corporate structure now. Only last month he was blogging about how renewables (wind and hydro in SSE’s case) and a regulated electricity network “fit together” and how there was “a strong strategic logic to them forming the low-carbon electricity core of SSE”.
It would be useful, though, if SSE directly addressed the argument that a conglomerate discount applies to the company’s share price. The appeal of Elliott’s vision, supposedly, is that a liberated renewables division would enjoy a sky-high rating in the style of the pure-play Danish group Orsted, and thus would be able to raise funding cheaply to accelerate growth.
Not every City analyst accepts that argument, it should be said. “Dividing the renewables and regulated businesses would be one of the most negative potential outcomes for SSE from a credit perspective, in our view,” wrote JP Morgan’s sector specialists on Monday, almost making the board’s argument for it.
It would be better to hear it from the horse’s mouth, complete with supporting evidence. What SSE definitely doesn’t need is many months of to-and-fro with Elliott.
Evergrande’s demise could be a lesson for the property sector
There was late relief for stock markets on a tricky day. The Biden administration, against expectations, lifted restrictions on travel to the US from the UK and most of the EU for vaccinated passengers from November. Shares in International Airlines Group, the owner of British Airways, rose 11% and the entire tone of the UK stock market improved.
Do not, though, think the big worry from the morning session – the fate of Evergrande, the over-extended Chinese property developer giant – has somehow disappeared. Evergrande has a mind-boggling $300bn in obligations to creditors and is faced with an administration in Beijing that, it seems, wants to teach the entire bubbly property sector a lesson. Creditors – but not homebuyers with deposits on unbuilt flats – will have to take a hit.
Can Beijing manage the exercise without causing collateral damage within its banking system? The market’s working assumption is: yes, probably. That thesis sounds roughly right but, as we saw in the west in the banking crisis, the idea the dominos can be scripted to fall in a controlled manner doesn’t always work.
Evergrande had a big debt repayment due on Thursday. The market will breath more easily if that hurdle is cleared without too much drama. But one can also imagine how this saga could bubble away for months. Beijing is not being transparent about its aims.