Gridlock in UK Power Markets
This report is released in the wake of the UK government's Clean Growth Strategy announcement on the 12th October and prior to further policy developments that will impact the electricity sector, such as the results of the Helm Review due late October.
This report finds the Big Six utility companies have undue influence on UK energy policy and regulation, hindering the clean energy transition and posing significant investor risk.
Through influencing the public narrative on the electricity sector (warning of "lights out" and higher power costs), CEO messaging, dominance of the official regulatory consultation processes and private meetings with policy makers - the Big 6 utilities have essentially captured the regulatory process. For example, the Big 6, National Grid and trade group Energy UK met with policy makers over twice as many times as all other electricity market players combined since 2015, a total of 166 meetings.
This report also highlights red flags for investors where top-line strategy statements from UK-company CEO’s are misaligned with their detailed lobbying positions and activities.
Policy capture poses shareholder and risk and energy price rises. In Germany, incumbents E.ON and RWE suffered up to an 80% fall in profitability after misreading the country's Energiewende (Energy Transition) policies of the early 2000s. A 2016 report from the UK Government noted that Smart Power, a trend the Big 6 are resisting, could save consumers £8 billion a year.
There is emerging consensus that the energy market is facing unprecedented disruption due to the trend towards decarbonised, decentralised and increasingly democratised energy and that this is now being driven as much by economics, technology and innovation as it is by government policy. It should concern investors that the business models of the Big 6 appear to be based on their current ability to maintain the status quo via regulatory influence. It should also be a concern that none of the Big 6’s lobbying activity is sufficiently aligned with this 3D transition, an indicator that they are perhaps not adequately preparing for the market disruption they face.
The research shows the incumbent utilities in the UK, through persistent and strategic capture of the policy process, appear to be clinging to outdated business models. History shows this usually ends badly for the shareholders of the companies most resistant to change.