‘Scaremongering’ British Gas boss Sam Laidlaw warns that Ofgem energy review could lead to blackouts
Consumer groups and MPs reject claims as Ofgem announces review that could break up the Big Six
British Gas was accused of “scaremongering” after its boss warned that the energy market investigation announced on Thursday had increased the risk of blackouts.
After years of pressure to shake-up the market, the energy regulator Ofgem has finally proposed the biggest ever review of competition in the gas and electricity industry. The two-year investigation, which critics said was long overdue, is due to start in June and could lead to the dominant “big six” providers being broken up into separate retail and energy generation businesses.
Sam Laidlaw, the chief executive of British Gas-owner Centrica, said potential investors would be put off backing new power plants during the probe because of the uncertainty it created about how it could change the energy market.
Mr Laidlaw said the reduction in investment would mean there was an “increasing risk” of blackouts and comes at a particularly bad time for Britain.
“Clearly if we have this competition referral our ability to invest is going to be handicapped because we wouldn’t invest in new power generation if there was a possibility that you might have to divest as a result of a competition referral. So that is the political risk during this period.”
“This is coming at a time when actually Britain’s energy security is being seriously challenged, not just in power generation but if you look and see what’s happening in Ukraine for gas supplies as well,” added Mr Laidlaw, who revealed yesterday that he made a total of £2.2m last year but will give his £851,000 bonus to charity.
But Mr Laidlaw’s comments were widely challenged on Thursday.
Ann Robinson, director of policy at uSwitch, the price comparison consultant, said: “I don’t think there will be a deterioration of investment as a result of the review and anybody that says there will is scaremongering.”
Ms Robinson said there are plenty of gas-fired power plants that have been mothballed recently as coal has become cheaper, which could be brought back into operation if needed. Furthermore, investment in low-carbon power plants such as nuclear, wind and solar, is unlikely to be threatened by the review because government subsidies give those generators a guaranteed price for electricity.
Politicians also rounded on Mr Laidlaw. Liberal Democrat business secretary Vince Cable called his comments “overdramatic”, while Energy Secretary Ed Davey said Mr Laidlaw “is absolutely, totally wrong and I can prove it. We have 14 contracts for power generation [in the pipeline] over the next 15 years.”
Caroline Flint, Labour’s Shadow Energy and Climate Change Secretary, said: “Nobody will be fooled by scaremongering from the energy companies. What matters for investors is long-term certainty on returns, not short-term gains based on overcharging.”
Dermot Nolan, the newly installed chief executive of Ofgem, said that investors were already dissuaded from backing projects amid huge uncertainty in the future of a market where consumer distrust is so high that some kind of shake-up seems inevitable and political uncertainty is putting off new entrants into the retail market. This investigation would actually increase investment – in the short term and the long term - by “clearing the air”, he argued.
The investigation will be carried out by the Competition and Markets Authority [CMA) and will focus mainly on the big six’ retail operation, rather than their generation businesses. It comes after a preliminary review by Ofgem found that 43 per cent of customers distrusted energy companies to be clear and honest about prices and that the big six combined profit from supplying households jumped from £233m in 2009 to £1.1bn in 2012. The regulator said the rapid increase suggested the big six could be making excess profits given that there is “no clear evidence that suppliers were becoming more efficient in reducing their own costs”. It may also be ripping off loyal customers by enticing new ones with cheaper prices.
The preliminary review also found evidence of “possible tacit co-ordination” given that their price changes tend to follow in rapid succession and be of a similar size and in the light of “new evidence that prices rise faster when costs rise than they reduce when costs fall”. Although tacit coordination is not a breach of competition law, it reduces competition and worsens the outcome for consumers, Ofgem said.
Ofgem also came under fire for not launching the investigation several years earlier.
Will Straw, an associate director at the IPPR thinktank, said: “Ofgem has known for years that there are major problems in the energy market. But time and time again, it has failed to deal with these problems.”
Tim Yeo, Conservative MP and chairman of the Energy and Climate Change Committee, said: “Ofgem’s announcement underlines the fact that the energy market has been failing consumers. Ofgem could have avoided this situation entirely if it had woken up earlier and implemented tough measures to increase the transparency of the energy industry.”
Mr Nolan, who took up his role this month, defended Ofgem’s past. “Plenty of action has been taken and this reference [to the CMA] compliments that. We have looked at the evidence very closely over a period of time and seen the persistence of the problem over a few years. But I think now is the right time because of the fall in consumer confidence.”
“I’m sure my predecessor [Alistair Buchanon] acted extremely well. But circumstances have changed as consumer trust got worse,” he added.
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