Rishi Sunak, when he was still chancellor and was coming round to the idea of a windfall tax, noticed a key point about today’s energy market. Not all the corporate winners in the UK from soaraway wholesale gas prices are producing hydrocarbons in the North Sea. Some are generating power from nuclear power stations, solar projects, windfarms and biomass and are enjoying the same high wholesale prices.
Those generators are benefiting from old-style contracts based on “renewables obligation certificates” (ROCs) and suchlike, rather than contracts-for-difference (CfD) arrangements that have been the main way of incentivising capacity in recent years. Under CfDs, excess revenues over the agreed “strike” price flow to the Treasury. That is not the case with ROCs, thus some spectacular improvements in corporate fortunes; the share price of biomass-heavy Drax is up two-thirds in the past 12 months, for instance.
In the event, Sunak confined his “energy profits levy” to oil and gas producers. It seems the Treasury was deterred by the complexities in the generation market, which was understandable up to a point. Much of the power is sold under long-term contracts, rather than at “spot” prices, and intermediaries sub-divide output many times. It is hard to get a firm grasp on where, precisely, windfall gains arise.
Here, though, is a proposal that cuts through some of the complexity. Encourage those generators with juicy old-style contracts to enter an auction to switch themselves on to CfD arrangements, suggests the consultancy Cornwall Insight. If they all did so, and if the price of power came out at £162 per megawatt hour – still high by historical standards but a lot less than the current month-ahead price of £435 – the resulting savings could be enormous. About £44.4bn over six months, it calculates (and the UK Energy Research Centre has been pushing the idea for months).
By way of incentive to companies to sign up, Cornwall says the new contracts could extend beyond the span of the old ones. In effect, the generators would get more certainty (and still a very nice price) over revenues in two or three years’ time in exchange for selling at sub-market lower prices today. Arm-twisting would also be in order, one could add: current returns are way beyond the original financiers’ wildest dreams.
At one level, Cornwall’s proposed reform is a technical tweak, but it gets to the heart of an infuriating aspect of the current electricity market set-up: the fact that wholesale gas prices dictate all power prices, thereby creating today’s bonanza profits for some renewable and nuclear projects whose fixed costs have barely changed. Sunak had a crack at the problem and didn’t get far. If the potential gain over the winter could really be £44.4bn, ministers should take another look urgently.
Letting HBOS bosses off hook a second time was a cop out
Last Friday may already feel like ancient history but let’s not forget the financial regulators’ timid verdict on events from much longer ago. The Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority told us at the end of last week that their six-year investigation result in no sanction being imposed on the banking bosses who steered HBOS on to the rocks in 2008.
Younger readers may need to be reminded that the catastrophe at HBOS was as bad as the one at the Royal Bank of Scotland. HBOS was meant to have a simple business model – one that didn’t rely on the racy world of investment banking – but managed to wreck itself via old-fashioned reckless lending. The bank was bailed out with £20bn of public money as it was shoved into the arms of its foolish rescuer, Lloyds TSB. The formal investigation in 2015 was scathing about dim-witted regulators at the old Financial Services Authority, but was clear on this point: “Ultimate responsibility for the failure of HBOS rests with its board.”
That was why the PRA and the FCA were prodded by the Treasury select committee into re-examining the decision not to look at sanctions against senior HBOS managers – assumed to mean the two HBOS chief executives of the era, James Crosby and Andy Hornby, plus a handful of others. Now, for the second time, the result is “no further action”.
It is unsatisfactory, to put it mildly. Yes, the rules around personal “culpability” were different in the old days. And, yes, Crosby and Hornby become unemployable for practical purposes in senior roles within the financial services industry (the latter these days is chief executive at the owner of Wagamama). But, come on, blaming the board as a collective while sparing individuals from censure is a cop-out. Public faith in the regulatory system has just fallen another notch.
