Bridging the power gap
Published : September 2006
Andrew Bainbridge, director general of the Major Energy Users’ Council, talks to Brian Davis about the chaos in the energy industry, and how he sees the threat from Russia’s energy ‘Rasputin’
“The average manufacturer doesn’t take energy buying seriously,” maintains Andrew Bainbridge, director general of the Major Energy Users’ Council. “Despite the importance of the matter, many lack shrewd energy buyers or managers, though efficient power purchase should be a priority.” With energy prices climbing to an all time high, and following publication of the Government’s new Energy Review, he calls for serious action at board level to foster more effective energy management strategies in companies large and small.
Bainbridge has been lobbying on behalf of the Major Energy Users’ Council since 1987, shortly after gas was privatised in the UK. He’s no stranger to controversy and reckons we’ve forgotten the energy crises of the 1970s and 1980s, while bathed in the glow of plentiful natural oil and gas resources from the North Sea. “Now with reserves plummeting and having become a net importer of gas and oil, we need to take a long hard look at our energy supply situation. Energy should be at the forefront of UK industry’s mind,” he said.
Following the launch of the npower Business Energy Index report which tracks the impact of volatility in UK wholesale energy markets over the past six months, Bainbridge reckons there’s urgent need for commercial energy users to address energy supply and efficiency. He is particularly concerned about potential UK shortfalls in international gas supplies for electricity generation this coming winter.
“Continued volatility in UK wholesale energy costs is fuelled by escalating global fossil fuel prices and impacts on businesses of all sizes. Companies should consider improving energy efficiency as a priority, reviewing energy costs, energy mix and purchasing patterns,” he says.
According to the Business Energy Index, 60 per cent of companies are experiencing energy cost increases. Rising energy costs continue to hit companies: 77 per cent of SMEs and 71 per cent of major energy users report lower profits as a result. Looking to the future, both large and small companies predict that energy costs will rise significantly during the next three years.
Bainbridge predicts much more chaos in the energy industry. He suggests commercial energy buyers must plan ahead to secure the best prices. Moreover, they need to get buy-in from the board to support these decisions. “There’s no time for delay, the gas supply crisis came to a head last year when some production lines – particularly in the energy intensive glass and chemicals industries – came to a halt because of the lack of gas fueled electricity generation.” As a result, some firms are considering moving their production lines abroad. But Bainbridge is optimistic they will only make the move as a last resort.
“Supply uncertainties really do make life difficult for the manufacturer. While energy prices were coming down, manufacturers were happy and the suppliers fought to get their business. But now there has been massive consolidation, in terms of UK energy company closures and overseas acquisition. Today there’s only a handful of gas and electricity suppliers left, and most of them are involved in supply of both gas and electricity – so your energy buying has to be very canny.
“The energy buyer needs to be clued-up about national and international energy markets, boasting a close relationship with energy suppliers at senior level. He must have access to up-to-the-minute market trading information, and clearly understand how suppliers’ minds work. Obviously the supplier’s job is to make a profit, so he will construct a contract to ensure he keeps the upper hand. Gas prices are pretty well all the same across the board, so the customer is more and more inclined not to go out to tender, but to try and negotiate a better deal with the existing energy supply incumbent.”
Are UK firms being held to ransom? Bainbridge considers that the UK energy supplier market has shrunk to such an extent that competition is “almost non-existent” for both gas and electricity. “Moreover, the energy supplier is unlikely to have a vast staff, and feels free to pick and choose who he wants to do business with. Consequently, if the customer is an amateur who doesn’t understand the new flexible contracting methods, he’s likely to lose out!”
Just to add to the pressure, Bainridge reckons that appearance by Russia’s Gazprom on the UK gas supply scene augurs ill for commercial consumers, given the Russians’ ultimate interest in acquisition of British Gas’s Centrica. “The company that makes me most nervous is Russia’s Gazprom. I like to call President Putin ‘Rasputin’ because he is known to play politics with Gazprom and has a voracious appetite for nefarious wheeling and dealing. RasPutin is on record as saying he wants Russia to be the world energy leader, and I believe he will stop at nothing to achieve that end.”
Bainbridge points to the recent acquisition of little minnow Pennine Natural Gas only a few weeks ago, which has just 600 customers. He feels this is the thin end of the wedge. “You can imagine how the Russians will transform the company by pouring millions into development in order to acquire a far bigger market share in the UK. The Russians will use Pennine as a UK base, while keeping an eye on Centrica, which is a huge operator and the premier British gas supply company. The Government lacks clear direction or response to this foreign threat. Gordon Brown said he won’t allow a takeover, but has since been contradicted by Tony Blair. If takeover goes ahead, it will have serious consequences for UK energy independence, whatever the Russians say to the contrary. This is a very serious concern.”
Bainbridge reckons that the rot set in sometime ago with energy market privatisation. “Britain was naive in thinking that a fully liberalised market would happen quickly. We got through our natural gas reserves and allowed foreign predators to buy up our companies. Now we’ve got our trousers around our knees and are not a pretty sight!”
He is concerned that the UK is dependent on overseas suppliers, despite OFGEM’s recent move to send a director round Europe to assess what levels of gas supply are going to be made available for the Brits this winter. “OFGEM plans to hold a series of seminars around the country to calm everybody’s nerves. But they admit that gas supplies are going to be tight this winter. If we are lucky and have an average winter, then we’ll scrape through. But if there is a severely cold spell, then industrial brown-outs are inevitable.
“Europe is a totally uneven playing field. Though additional gas capacity is available through the Interconnector and new pipelines from the continent, nobody is obliged to fill the Interconnector with gas for Britain. The continental suppliers will simply supply their own customers first and are under no EU obligation to supply gas to Britain.”
The EU Competition Commissioner Neely Kroes recently sent a team from Brussels to make dawn raids on energy suppliers. According to Bainbridge, they seized a pile of documentation during an investigation of restrictive practice across the EU market, and the findings are due to be released in December. “Massive fines are likely to be imposed for malpractice on the key supply companies, probably resulting in a
bun-fight among the lawyers.”
Bainbridge has no doubt that the European Commission means business. “They want a truly liberalised EU market. But the member states and country champions are fighting hard in their own corners to keep things as they are. You can’t blame them, each country wants to retain its own independence, in order to make its own pricing and supply decisions in its own interests. Frankly, these state-owned monopolies are very comfortable as they are.”
As a leading energy lobbyist pressing for a healthy supply mix, Bainbridge responds to the Government’s new Energy Review with some enthusiasm. “It’s been known for some time that we need a mix of energy supply possibilities in the UK. We need new gas fired power plant to replace ageing nuclear and gas fired plant, for that matter. We also need clean coal and renewables. But the cost of all this new investment is horrendous, and we are very short of engineers and the skill base we need to build these plants on time and on budget.”
Bainbridge also argues that a great barrier to progress for new power generation investment is the length of time it takes to get planning permission. “What’s more, the cost is enormous and apparently you need 6,000 windmills to generate the amount of electricity you can generate from one nuclear plant! My question is: where will we put them all? There are so many ‘experts’ arguing the toss, that the only certainty is that customers will end up footing the bill.”
All in all, Bainbridge reckons that the buck must stop at the top in UK industry. “Energy doesn’t get the attention in the boardroom it deserves. Far greater attention is paid to HR, finance and marketing. Consequently, the average company doesn’t have smart energy buying and management in place. Manufacturers should ask: Who on the board really understands energy supply today? Who is capable of monitoring the performance of energy purchase and consumption, with the same seriousness they address other areas of key business strategy?”
Given the rapidly escalating crisis in energy markets today, UK firms of all sizes will have to address effective energy purchase as a matter of urgency.