Comment

James Ashton: Heat is on energy firms to explain themselves

The new boss of gas giant Centrica, Iain Conn, faces the threat of a break-up and a row over profiteering
Wind of change: rising prices are in part due to energy companies having to absorb green levies
James Ashton
31 July 2014

What sort of man risks becoming Britain’s most vilified business leader? In Iain Conn, confirmed this week as the next chief executive of Centrica, we are about to find out. With the possible exception of banking, energy is the business story of the next few years. As the biggest of the Big Six providers, the British Gas owner is perennially in the eye of the political storm.

Conn must be a glutton for punishment. He sat on the BP board right through the crisis caused by the Gulf of Mexico oil spill, which is still being paid for. In choosing his next post, he could have been forgiven for opting for a quieter life, but he has done anything but.

At Centrica, Conn must contend with a competition probe that could lead to the break-up of the company, Labour’s pledge to cap prices, claims of profiteering, a stumbling share price and an exodus of executive talent. He must calculate these problems are not intractable. My view is that Conn’s mission, when he finally replaces Sam Laidlaw in January, can be summed up in two words: regain trust.

The energy industry is not alone in having lost society’s faith. The media, the Church and banks have all taken their turn under that black cloud in the past five years. But the Big Six’s social contract has been shattered as bills have spiralled and suppliers, seemingly acting in lock-step, have struggled to explain why. In order for them to prosper they must strike a peace deal with ministers, boost transparency right across their businesses, improve customer service and, crucially for the City, get used to lower profit margins.

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What Conn can take solace from is that British Gas elicits trust in spades. Little is written about the thousands of customers who are happy to leave their keys with a British Gas boiler engineer while they go out to work. If only he could extend that trust right up the organisation.

Even as London swelters, energy providers know the heat is not off them and that they must explain themselves better. They could start with the vagaries of the relationship between the retail and wholesale energy markets and why wholesale prices can fall but customer bills remain high.

It is a contradictory industry. Why else could the mild weather have cost Centrica money in Britain because less gas was sold, but in North America, where it has amassed five million residential and business customers, the polar vortex was bad news because wholesale prices spiked? As seen by the commentary that accompanied today’s tumbling half-year profits and Ofgem’s industry data, Centrica and its regulator can’t even agree over how much money the company can be expected to make per customer.

But it must also work harder to spell out its contribution to the renewable energy revolution it has been bounced into underwriting. Recent figures show that there was a 43 per cent rise in the amount of electricity produced from wind, solar and hydro power last year. These costly energy sources didn’t materialise from nowhere. A significant chunk of inflated bills have come from environmental levies that Centrica and others have been forced to charge to fund cleaner, greener energy supplies.

If clarity is the answer, does simply breaking up these businesses improve matters? Conn goes into the Competition and Markets Authority probe knowing that Centrica has to justify its existence. The chances are that a broken-up group is a weaker one. With less financial muscle to strike long-term supply deals, a break-up might even lead to higher bills.

Centrica, whose shares are 20 per cent lower than last September when Ed Miliband made his threat to freeze prices, has to spell that out. At the moment, the upstream exploration arm and downstream retail operation are like ships that pass in the night — and not just because Centrica Energy is based in leafy Windsor while British Gas is run from grittier Staines.

The industry needs to remind ministers that only private sector money will build new power stations — and as dirty, decrepit plants are taken out of service the spectre of power blackouts remains a real possibility.

The legacy left behind by the browbeaten Laidlaw is one of long-term supply deals with Qatar and Norway. Next year, the £1.4 billion Cygnus project to develop a new North Sea Gas field will go into production, supplying energy for 1.5 million homes at its peak. Profits are not simply lining the pockets of shareholders and executives. A little flag-waving its achievements would not go amiss.

Most energy executives concede that redrawing the energy landscape through the forced separation of generation and supply is unlikely to happen. They hope that the accusations of anti-competitive pricing will die down when smart meters that provide the information to compare the best deals are in widespread operation. For Centrica, which has already installed 1.3 million of them, it will help.

And is Conn the right man to lead the industry back from the wilderness? He is certainly chief executive material. Some say he might have jumped from BP — where he has spent nearly 30 years — sooner to a top job if it wasn’t for the tarnishing effect the Gulf of Mexico spill had on all BP executives.

But whether he has got the populist touch remains to be seen. In Laidlaw, Centrica had an upstream chief executive with a downstream problem to tackle. Conn should be far more in tune with consumers. At BP, he has managed petrol stations and polished up the Castrol oil brand. That’s great, up to a point. My impression is the Scot is hardly likely to become the Justin King of the energy world.

Still, he deserves his chance. Few would disagree that energy is a vital industry in dire need of investment. The current stand-off cannot continue.