Centrica 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 correct conclusion: they’re up for a negotiation with government to cap the price of electricity.
So they should be, of course. Even if the size of windfall profits being collected by generators is currently unclear, nobody doubts the fact of outsized returns when current forward-selling contracts fall away. The wholesale price of electricity, absurdly, is tied to the price of gas, creating nonsensical outcomes in those corners of the generation market where input prices are virtually unchanged.
One could, perhaps, be slightly nervous that Centrica and EDF have volunteered for duty so speedily. The companies aren’t charities and they’ll be looking for something for themselves – namely medium or long-term guarantees on prices. That worry, though, is really an argument for transparency when the deal-making begins. At this stage, willingness to come to the table is what matters. It’s up to ministers, if they’re really dead-set against new windfall taxes, to thrash out decent terms to protect the public purse.
So where are the other corporate volunteers? Drax, as a biomass-based business, tends to be overlooked in the focus on nuclear, wind and solar generators, but it is in exactly the same lucky economic boat. Burning wood pellets to generate power is a lucrative business if you’re being paid as if you’re a gas generator. Witness the jump in Drax’s profits, and two-thirds improvement in the share price, since wholesale energy started to climb last autumn.
Since Drax is also the beneficiary of stupendous support under current arrangements (thinktank Ember calculates that from 2012 until 2027, the company will have collected more than £11bn in government subsidies), it ought to have been the first company to say it will come to the table. Will Drax play ball? Aside from a few boiler-plate words about working in partnership with government, Drax on Monday was gloriously unclear about its readiness to negotiate. Not good enough. Get with the programme.
Reasons to admire outgoing Serco CEO’s corporate rescue job
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. Nor is suspicion remotely surprising given that the outsourcing firm only emerged a few months ago from a three-year deferred prosecution agreement with the Serious Fraud Office related to past shenanigans with electronic tagging contracts for prisoners.
There are, though, two strong reasons to admire the corporate rescue job performed by chief executive Rupert Soames, who on Monday announced his looming retirement (“outsourcing myself”, as he put it). The first is that Serco still exists.
Back in 2014, survival wasn’t guaranteed. Aside from the scandal with tags, Soames inherited a £1.5bn annual loss and a chunk of contracts that made no commercial sense for the provider. The company was an operational and balance-sheet mess. Soames served up a £150m rights issue as an amuse bouche on day one, and made investors swallow a £550m thumper the following year. Both fundraisers were essentially acts of faith on the part of investors.
Turnaround wasn’t quick, but the new strategic direction has been vindicated. Today’s Serco is a government-only contractor with a greater international spread (particularly in North America) and a bias towards defence. Progress from the 100p rights issue price to today’s 168p has been steady, rather than spectacular, but that is roughly what low-margin contractors should deliver: a touch of reliability. Investors have been much better off by owning Serco in the period than outsourcing twin Capita (let alone its cousin, the late and unlamented Carillion).
Soames, 63, will be replaced by Mark Irwin, who seems to have been earmarked for succession for a while. One hopes the new man has digested the second lesson of the Soames era: speak plainly, acknowledge that outsourcing is controversial and be prepared to debate your critics.
A few non-believers will never accept that public services should be delivered by private companies. The rest of us know that it is often a better way to deliver value for money – but we do still want maximum transparency from the providers.
