Section:OBS 2N PaGe:51 Edition Date:190804 Edition:01 Zone: Sent at 3/8/2019 9:39 cYanmaGentaYellowblac
- The Observer
Energy industry 04.08.19 51
Source: Refinitiv15 16 17 18 19300
250
200
150
100
50Share price, penceCentrica
Conn focused
Centrica on
supplying
electricity and
gas, along with
‘smart’ services,
but the bet
failed to pay off.
Photograph by
Jon Bower/AlamyLEFT
Iain Conn
believes that
‘customers are
interested in
more than just
energy’. PARIGHT
Selling energy
to homes via
British Gas once
made up a third
of Centrica’s
operating profi t.famous British business. Centrica is
an exemplar of the privatisation drive
that has shaped the corporate land-
scape since the mid-1990s. It was born
out of the same privatisation endeav-
our that produced National Grid and
gas giant BG Group , now owned by
Royal Dutch Shell. But Centrica has
fared far worse.
National Grid may face the threat of
renationalisation under Labour , but
it is a £30bn company with strong
growth prospects in the US. BG Group
was snapped up by Shell three years
ago for £36bn as a pivotal part of the
oil major’s future strategy. By con-
trast, Centrica’s market value has
fallen to less than a fi fth of its value
a decade ago, and is worth less than
£4.5bn today. Senior City sources
and industry executives agree there
is little choice but to strip the former
energy behemoth for parts.
The board has already agreed plansto flog its one-fifth stake in EDF
Energy’s UK nuclear reactors , and
sell off its oil and gas business Spirit
Energy. If Centrica’s share price con-
tinues to fall, the incoming chief may
face a tougher choice: to trade the
most profi table parts of the business
for a short-term fi nancial reprieve.
“Centrica owns some real gems but
together it is too big and too messy.
You only need to look at the share
price to see that the City believes that
the company is worth less than the
sum of its parts,” one City banker said.
The gems include a US supplier,
Direct Energy, and an energy solu-
tions business that spans 34 countries- attractive to buyers but also core to
the company’s future growth.
Selling energy to homes through
British Gas made up about a third of
Centrica’s operating profi t before the
government’s cap on tariffs came in.
Today, that business accounts for only
15% of its profi t.
The same is broadly true of
Centrica’s nearest rival, SSE, which
is hoping to sell off its home energy
business to focus on more straight-
forward returns from running wind
farms and energy networks. The dif-
ference is that Centrica has no fall-
back plan; the dwindling customer
numbers are still core.
“Energy customers are interested
in more than just energy,” Conn has
said. “Some of our customers only
want energy at the cheapest price and
they don’t care who it comes from.
But others actually want more than
energy. They’re willing to buy insur-
ance services from us; boiler cover,
home cover, Hive [smart meters].
They are taking an interest in the
things that help their lives run better.”
Seizing this opportunity in home
services could help Centrica run bet-
ter too, and gives an idea of how the
brand may evolve in the years ahead.
“Converting energy customers into
customers for new propositions is the
direction of travel. We have gone from
energy company to energy and ser-
vices company. One day, we might
be a services company with energy
as one of those services,” Conn said.
Britain’s biggest energy supplier
may survive, but not as it is today.
The odds
were
against
Conn; he
inherited
the
wrong
kind of
company,
at the
worst
time
Nervous utilities
groups look
beyond the UK
E
nergy suppliers may be
on the frontline of the
battle to win public trust
in the industry, but it is
the companies behind
the gas pipes and elec-
tricity wires which have emerged as
the easiest political targets.
The network operators, includ-
ing National Grid and UK Power
Networks, are facing a fi erce polit-
ical skirmish. The industry regula-
tor has already cut the returns they
are allowed to make to all-time lows.
An even greater risk looms beyond
the next general election, now that
Labour has pledged to bring the com-
panies back under public control.
Critics of the fi rms argue that the
crackdown is an inevitable conse-
quence of the years they have spent
“inflating” household energy bills
while siphoning off billions in divi-
dends for their international invest-
ment-fund owners. They are held up,
alongside water companies and rail
operators, as evidence of Britain’s
failed experiment with privatisation.
The companies are quick to point
out that the prices they levy through
energy bills have fallen 17% since
the sector w as liberalised in the
1990s, while private investment has
climbed to about £100bn over the
period. Renationalising would mean
less investment and higher bills , they
say. But as their defence falls on deaf
ears, the operators of Britain’s energy
infrastructure are becoming jittery.
John Pettigrew , National Grid’s
chief executive, has warned that
there are deepening concerns over
the UK’s political landscape, particu-
larly among the company’s interna-
tional investors. “When I talk to our
investors overseas, what is impor-
tant to them is a stable regulatory and
political environment. The debate on
state ownership has them increas-
ingly concerned,” he said.
Pettigrew joined National Grid as a
graduate in 1990, just weeks after pri-
vatisation. Almost 30 years later, the
free-market holy grail is tarnished by
a deep mistrust of private investors
and rip-off capitalism.
Today, Pettigrew is steering one of
Britain’s most high-profi le examples
of liberalisation away from the UK
and towards the United States.
The FTSE 100 company undertakes
the same work it carries out in the UK
across 9,000 miles of US electricity
cables in fi ve states. The US is a mar-
ket which generates more revenue for
the company than the UK, with less
political risk, and stands to attract
most of its future investment too.
Pettigrew said earlier this year that
National Grid plan ned to increase itsinvestment in its frontier market from
$3.5bn (£2.9bn) in the 2018- 19 fi nan-
cial year to $5bn. It already employs
more than double the number of
employees in the States than it does
in the UK, and it expects the business
to grow beyond gas pipes and elec-
tricity lines too.
Earlier this year, National Grid tied
up a $100m deal to acquire US renew-
able s company Geronimo through
National Grid Ventures, its new ven-
ture-capital fund based in Silicon
Valley. The innovation arm now owns
a string of wind and solar farms and
plans to fund new tech startups in
the US with an initial investment of
$250m over the next two years.
The American market offers a safe
haven for National Grid’s investments
that lie beyond political upheaval. But
it is also a market in which Pettigrew
can expect stronger growth, and sup-
port from state offi cials to upgrade
the grid and add electric-vehicle
charge points.
One senior industry boss, who
asked not to be named, said major
international investors were looking
elsewhere too. “Investors are look-
ing at the UK right now and ask-
ing whether it is the right time to be
investing in any kind of regulated util-
ity in the UK,” he said. “Investors con-
sider two things: the opportunity andthe environment. The UK’s decision to
create a net-zero-carbon economy is
a colossal opportunity, but the envi-
ronment has given investors pause
for thought .”
Even those investors who believe
a Labour government may pay a fair
price for their assets in the event
o f renationalisation are concerned
about draconian regulation and the
threat of a no-deal Brexit: “The prob-
lem is that the need for investment in
the energy industry is now.”
The UK government’s strong sup-
port for building offshore wind tur-
bines and electric vehicles will still
need investment in the pylons, sub-
stations and powerlines which con-
nect renewable energy to homes and
charge points, industry sources say.
The need to wean households off
fossil fuels for home heating could
require even more ambitious work to
overhaul the country’s gas grids too.
“The most critical thing about
net zero carbon is about the speed
of delivery – the last thing anybody
should be thinking about doing is
slowing this industry down,” the
energy boss warned.
Jillian AmbroseJohn Pettigrew
is steering
National
Grid towards
expansion in
the United
States.Fears over Brexit and
renationalisation are
spooking privatised
fi rms’ global investorsРЕЛИЗ
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