energy

SSE warns on Labour proposal to nationalise networks

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Energy network companies should not be treated the same as other industries such as water by the UK’s Labour Party, which wants to renationalise large parts of the economy, as they do not have the same “issues” with poor performance, says the boss of SSE.

Alistair Phillips-Davies, chief executive of the FTSE 100 utility, said the complexity and distraction of taking energy networks back into state ownership would also “significantly delay” changes needed to meet the UK’s 2050 net zero emissions target, such as rolling out sufficient electric vehicle charging.

Shares in publicly listed network companies, which own the pipes and wires that deliver electricity and gas from power generators and terminals to homes and businesses, have struggled since the Labour Party first identified the industry as a nationalisation target in its 2017 election manifesto.

Labour in May published a more detailed policy pamphlet, warning that investors would be unlikely to receive compensation based on market value and accusing network companies of overcharging customers “to the order of billions of pounds”.

Despite the threat, Mr Phillips-Davies said he was hopeful Labour could be persuaded it would be a “huge mistake” to take back public control of an industry that was privatised from 1986 onwards and which he insists was “high performing”.

“Everybody [all of the political parties] agrees on net zero,” said Mr Phillips-Davies. “I think the bit about state control would be a huge, huge mistake, it would significantly delay what people want to so ultimately I don’t think people will go there and I think we will persuade them that’s absolutely the wrong thing to do.”

Mr Phillips-Davies added there was “absolutely no doubt we’re different” from other industries that are also in Labour’s sights, in particular the water industry, part of which has been criticised in recent years for poor performance, pollution incidents and paying owners generous dividends.

“Some of the owners in the water industry have obviously stripped those companies of dividends,” Mr Phillips-Davies said. “There’s a huge difference between the performance of some — not all — water companies . . . and what I think the bulk of the electricity industry has done.”

Labour’s nationalisation proposals are the latest political threat to an energy sector whose biggest players have also faced pressure from the introduction this year of a government-mandated cap on bills for 11m households.

The political attacks have exacerbated problems for large utilities at a time when the energy market is undergoing radical change, including the continued shift away from fossil fuel power generation to renewables and more electricity being generated locally

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Last year SSE overhauled its strategy and placed its bets on renewable electricity generation and networks, despite the nationalisation threats.

It hopes to complete early next year a £500m deal struck in September to offload its household energy supply business in Britain to Ovo. It has also put up for sale its North Sea gas production assets. Its last coal-fired power station will close early next year.

SSE was among the biggest winners in a UK government auction in September for contracts to build vast wind farms off the coast of Britain. The developments have helped SSE’s shares gain more than a fifth since the end of May.

However, the offshore wind market is not without its risks. It has become increasingly competitive as governments try to minimise costs to their taxpayers of building renewable energy schemes and more companies, including the oil majors, pile in.

SSE and other winners in the UK auction such as Norway’s Equinor pledged to build offshore wind schemes for guaranteed prices of electricity that are below forecasts for wholesale prices. 

Mr Phillips-Davies acknowledged that returns in the sector are becoming thinner but said he still expected to make “double-digit equity returns” on those projects secured in September because the costs of constructing and operating offshore wind farms have fallen dramatically in recent decades as the industry has matured and turbines have become bigger and more efficient.

“None of the projects that we have bid on, we believe, are loss-leaders. We all believe that they are absolutely consistent with what we need to earn to pay the dividends to our shareholders but we are having to work very hard to do it,” he said.

Mr Phillips-Davies insisted renewables were still the safer bet because oil and gas “isn’t really going to exist” in north-west Europe in 20-30 years’ time.

“Unless you have carbon capture and storage, I don’t see a lot of people using oil and gas post 2040,” he said.

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