The new chief executive of Centrica, Sam Laidlaw, underwent a baptism of fire yesterday as its British Gas division announced a fresh round of price rises, taking the average annual household energy bill above £1,000 for the first time. Even the Government was moved to criticise Britain's biggest energy company, with the Department of Trade and Industry calling on customers to shop around for another supplier.
British Gas lost 432,000 accounts in the first half of the year and the consumer group Energywatch urged more of its 16.6 million customers to defect. It calculated the average British Gas customer could save £276 a year on a combined gas and electricity bill by moving to the cheapest supplier in the market, currently npower.
British Gas confirmed that from September its gas prices would rise by 12.4 per cent and electricity prices by 9.4 per cent - the company's sixth increase since April 2003 - provoking howls of protest and calls for the Government to step in.
The typical annual gas bill for a customer paying by monthly direct debit will increase to £634. For electricity customers, the average annual bill will rise to £409, costing its customers an extra £884m a year, according to the website uSwitch.com.
Mr Laidlaw, who has been in the job for less than a month, defended the price rises, saying Centrica had no option in the face of a 71 per cent increase in wholesale gas prices in the past 12 months. He said that even though British Gas last raised its tariffs as recently as March - when bills went up by 22 per cent - its residential energy business still lost £143m in the first six months of the year.
"Our immediate agenda is clear. We must restore the core UK residential energy business to an acceptable level of return," he added.
The increased losses on residential energy resulted in Centrica's operating profits for the six months to the end of June falling by 29 per cent to £692m, despite higher profits from the group's wholesale energy, gas storage and North American divisions.
Mr Laidlaw argued that price rises were essential for Centrica to underpin the massive investment necessary to secure long-term supplies of gas as the UK increasingly switched to being a net importer. Centrica has already contracted to spend £18bn to secure future gas supplies through a series of deals with Statoil of Norway, Holland's Gas Uni and Petronas of Malaysia and is looking to negotiate further long-term contracts with other overseas suppliers, including Russia's Gazprom.
Mr Laidlaw indicated, however, that Centrica's target of sourcing 35 per cent of its gas needs from its own fields was under review due to the high cost of buying upstream oil and gas businesses. About a quarter of Centrica's gas comes from its own production fields - mainly Morecambe Bay off the North-west coast.
Price increases are one element in the drive to return the residential business to profitability. Another is the group's £200m cost-cutting plan. So far, Centrica has moved 1,000 jobs offshore from its 30,000-strong UK workforce and it expects the UK headcount to be down by a further 1,100 by the end of the year. Further savings will be made once all of its customers have been moved on to a new single billing system.
Mr Laidlaw even held out the faint prospect of gas prices starting to fall back next year, as new pipeline capacity came on stream. The BBL and Langeled pipelines from the Netherlands and Norway, together with an expansion of the existing interconnector from Belgium, will bring new capacity on stream equal to half the UK's annual demand.
"I hope prices will come down, but it will all depend on how much gas comes into the UK and what happens to the oil price, which is pretty volatile," he added.
Gas prices are Mr Laidlaw's biggest challenge but they are not his only one. His last but one job running Enterprise Oil came to an abrupt end when Royal Dutch Shell bought the company and his new employer is also on the wrong end of persistent takeover speculation with Gazprom publicly acknowledging its interest in bidding.
But Mr Laidlaw played down the prospect of a move by Gazprom. "I think we can deliver further shareholder value in more conventional ways," he said. "You can never rule out a bid but there is no indication it is about to happen and there have been no discussions with Gazprom."
Part of the growth will come from further expansion into the US market, where Centrica has 5 million customers, and in Europe, where the group has a toehold in Holland. Phil Bentley, Centrica's finance director, says the potential in the US market is huge, pointing out Texas alone consumes more electricity on a hot day than the UK does on a cold one. In the past year, Centrica has moved into five new states, and if there is one market which Mr Laidlaw understands it is the US. Before joining Centrica, he spent three years as a senior executive with the US oil major Chevron.
Progress in Europe is likely to be slower, he says, due to the snail's pace at which the monopoly operators on the Continent are opening up their domestic markets. "We will continue to lobby for increased transparency and open access to wholesale markets in Europe and faster progress towards real competition in the retail markets," Mr Laidlaw says.
He hesitates to criticise the previous management for embarking on a strategy which saw Centrica diversify into roadside breakdown services, with the acquisition of the AA, and financial services, through the Goldfish experiment, when perhaps it should have been concentrating on energy.
In fact, he says, his predecessor Sir Roy Gardner moved "pretty quickly" when it became apparent that wholesale energy prices were beginning to shoot up, buying power stations at competitive prices and snapping up the Rough gas storage facility in the North Sea for £304m. That latter deal is now viewed as a steal by City analysts who expect Rough alone to make a profit for the full year of around £200m.
There is no sign Mr Laidlaw will do anything other than stick to his knitting. One senior investment banker and energy expert reckons the dream merger would be to marry Centrica's huge customer base to the equally large generating capacity operated by the nuclear power company British Energy.
But Mr Laidlaw is dismissive of the idea. He is also very cautious about how easy it will be to replace Britain's nuclear fleet with a new generation of stations without some form of government support.
"There remain some big issues around the economics of nuclear power," he says. "First, there is the cost of decommissioning and dealing with spent fuel, which the Government has said the private sector must pay for. Then there is the whole issue of carbon pricing and what happens to the regime after 2012. We will see if backers come forward, but without greater certainty on carbon pricing it is going to be difficult for new nuclear to be competitive on price."Reuse content