Battle for energy – this year’s political football

29 October 2013

Tristan Colgate

Tristan Colgate

Former Managing Director

I can’t remember a day over the past week or so when energy was not in the headlines – the public backlash to energy utility companies raising prices, the announcement of the new nuclear power plant, Hinckley Point C, and now the closure of the Grangemouth refinery.  There is a strong political element to all of these stories that reminds us of the size and importance of the energy industry. 

Utility companies have been accused of profiteering, and are the latest political football now that bankers have been adequately based.  The reality is that these large companies already operate on low margins which can be problematic as they rely heavily on outside investment to fund their large capital projects.  Further weakening these companies through the various mechanisms being proposed (price cap by Ed Milliband and a windfall tax from John Major) makes these large UK companies takeover prospects – just look at what has happened to E.ON’s share price in Germany.  It would be bad for UK PLC if these companies were to be bought by an overseas company – UK headquartered companies buy their services in the UK; those with overseas owners less so.

Politicians of all colours should remember that we already have some of the lowest energy prices is western Europe and that government interference in the energy market through price setting or punitive tax regimes is not the way to address perceived high prices.  Rather, they should look at the framework that the energy market works in and ensuring that competition is maximised – allow the market to provide the downwards pressure on prices.

The investment model for Hinckley Point C is interestingly different with the taxpayer investing nothing up front for development of the plant but entering into a hedge arrangement with EDF over the future energy price.  Politically this allows the government to hail their success in getting this much-needed investment in energy off the ground without any immediate cost for the taxpayer to bear.

The closure at Grangemouth has an interesting twist in terms of English-Scottish politics, and is a test of Alex Salmond’s influence.  His call last week for the owners and Unite to resolve their difference fell on deaf ears.  His challenge now is to find a new buyer for the site or risk being seen as impotent in being able to safeguard Scottish jobs.

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