VSEntrica and EDF, the duo behind the UK’s current fleet of nuclear power stations, have read the political breezes, sensed the popular mood and come to the right conclusion: they are prepared to negotiate with the government to cap the price of electricity.
So they should be, of course. Even though the extent of the windfall profits collected by producers is currently unclear, no one doubts that windfall returns will be generated when current futures contracts fall. The wholesale price of electricity, absurdly, is tied to the price of gas, creating absurd results in corners of the generation market where input prices are virtually unchanged.
We might be a little nervous that Centrica and EDF volunteered so quickly. The companies are not charities and they will be looking for something for themselves, namely medium or long term price guarantees. This worry, however, is really an argument for transparency when trading begins. At this point, the willingness to come to the table is what matters. It is up to the ministers, if they are really decided on new exceptional taxes, to find decent conditions to protect public funds.
Where are the other corporate volunteers? Drax, as a biomass-based company, tends to get overlooked in the focus on nuclear, wind and solar generators, but it’s in the exact same lucky economic boat. Burning wood pellets to generate electricity is a lucrative business if you are paid as if you were a gas generator. Evidenced by the jump in Drax’s earnings and two-thirds improvement in the share price since wholesale energy began to climb last fall.
Given that Drax also enjoys extraordinary support under current arrangements (think tank Ember calculates that from 2012 to 2027 the company will have raised over £11bn in government grants), it should have to be the first company to say it would come to the table. Will Drax play ball? Aside from a few boilerplate words about working in partnership with the government, Drax was unclear Monday about his willingness to negotiate. Not good enough. Get with the program.
Reasons to admire outgoing Serco CEO’s business rescue work
Serco is one of those companies that is doomed never to enjoy popular acclaim and affection – or even, in some quarters, acceptance. That’s life. The suspicions are also unsurprising given that the outsourcing company only a few months ago emerged from a three-year deferred prosecution agreement with the Serious Fraud Office linked to past shenanigans with tagging contracts. electronics for prisoners.
There are, however, two good reasons to admire the business rescue work being done by chief executive Rupert Soames, who on Monday announced his impending retirement (“outsourcing,” as he put it). The first is that Serco still exists.
In 2014, survival was not guaranteed. As well as the tag scandal, Soames inherited an annual loss of £1.5billion and part of the contracts that made no commercial sense for the supplier. The company was an operational and balance sheet mess. Soames served up a £150million rights issue as an appetizer on day one and gulped investors down a £550million thumper the following year. Both fundraisers were essentially leaps of faith on the part of investors.
The turnaround was not quick, but the new strategic direction was justified. Today, Serco is a government-only contractor with greater international reach (particularly in North America) and a defense bias. The rise in the rights issue price from 100p to today’s 168p has been steady, rather than dramatic, but that’s pretty much what low-margin entrepreneurs should offer: a touch of reliability. Investors were much better off owning Serco during the period than outsourcing twin Capita (not to mention its cousin, the late and lamented Carillion).
Soames, 63, will be replaced by Mark Irwin, who has appeared to be the successor for some time. Hopefully the new man has digested the second lesson of the Soames era: speak clearly, acknowledge that outsourcing is controversial, and be prepared to debate your critics.
Some non-believers will never accept that public services are provided by private companies. The rest of us know that’s often a better way to deliver better value – but we still want maximum transparency from suppliers.
Centrica and EDF are at the table – now UK ministers must set a fair electricity price