Public water contract – ultimate in market madness

Paying a privatised English water company to provide Scottish public water to Scotland’s public services has to be the ultimate in market madness.


An article in yesterday’s SundayTimes reports that the Scottish Government is about to award a massive contract to provide water and waste water services for most of Scotland’s public bodies to Anglian Water, which is based in Huntingdon.


If you thought we had a public water service in Scotland, you might be a bit confused at this stage. Well we do, but it’s looking a bit frayed at the edges.


Scottish Water is a public corporation (even if it often wrongly calls itself a ‘company’) accountable to Scottish Ministers and the Scottish Parliament. Scottish Water is responsible for the provision of water and waste water services to almost all domestic and non-domestic properties and for maintaining the public system. There are some small scale privatewater supplies, largely in rural areas.


However, there is competition in the provision of customer-facing activities such as billing, charge collection, meter-readingand complaints handling for non-domestic customers in Scotland. This means that Scottish Water levies a wholesale charge on licensed retailers for non-domestic customers. Licensed retailers can agree their own charges with customers, subject to them being no higher than a default tariff set by the Water Industry Commission Scotland(WICS). Scottish Water is also a retailer, through its own retail arm BusinessStream, which provides a service to the vast majority of non-domestic customers in Scotland.


As the public bodies are non-domestic customers they come under this system of retail competition and the Scottish Government, actually the then Infrastructure Secretary Nicola Sturgeon, put one big contract for public bodies out to tender last August.


The driving enthusiasm for non-domestic competition was the WICS CEO – a well known supporter of privatisation. So keen that he promoted the scheme’s extension to England and Wales. UNISON has always argued that this arrangement is an expensive waste of effort. The WICS claims it has resulted in savings, but in practice these savings are all about water efficiency, not marginal differences in billing systems.


Non-domestic competition is not the only area of privatisation. Last year the insider web site ‘Utilities Scotland’ submitted FoI requests to ascertain the extent of privatisation in the delivery of the water and wastewater capital programme. In the last four years, 92.5% of Scottish Water’s capital programme has been delivered by private contractors, 7.5% by ScottishWater staff. By any standard that is substantial privatisation. This is on top of PFI schemes run by a variety of privatised water companies.


Weare also concerned about the impact the Transatlantic Trade and Investment Partnership (TTIP) could have for Scotland’s public service model. The greater the privatisation, the easier it will be for overseas corporate interests to challenge our public water system.


There is a certain historical irony in the Scottish Government exporting Scottish jobs to Huntingdon. The Earldom of Huntingdon was held by Scottish kings, most famously by David 1 in the 12th century. He used the revenues to build several abbeys in Scotland and generally spruce up public buildings. On the other hand, Oliver Cromwell came from Huntingdon and he knocked down quite a few public buildings in Scotland. Also, a later Lord Huntingdon was a custodian of Mary, Queen of Scots – that didn’t end well either!


ScottishWater is a public sector success story, but we are only too aware that there is a powerful lobby for privatisation. As I said in yesterday’s Sunday Times, the gradual drip of privatisation will have reached a new high if this contract is awarded to Anglian Water. The privatisation sharks are still circling ScottishWater and we need to remain vigilant.

 

Energy profits and the failed market

Scottish Power profits have increased by 41% year-on-year in its generation and supply business for 2014. This comes after the Competitions Authority said the Big Six providers, including Scottish Power, were overcharging loyal customers by £234.

Scottish Power's parent group Iberdrola reported an increase in profits to €139.1 million, from €81.2 million in 2013. They also gained 10,000 new customers. However, profits were down 17% at the company’s SP Energy Networks business from €578.6 million to €479.7 million. Profits were also down in UK renewables with net profit €55.9 million in 2014 compared to €130.6 million in 2013.

Iberdrola chairman Ignacio Galán had some interesting comments on offshore wind, he said: “One of our key priorities is to play a leading part in reducing costs for offshore wind and we believe that our large scale future projects in the UK will be able to deliver power at a significantly lower price than many people expect. We are looking to a future when offshore wind will be competitive with fossil generation, contrary to some expectations.”

In contrast Centrica, which trades as Scottish Gas, announced a 35% cut in profits. The retail business had a 20% cut in profits, attributed to lower retail consumption due to 2014’s historically mild temperatures. However, losing customers has also played a part in the weaker results.

The report by the Competition and Markets Authority (CMA) shows that the Big Six energy companies are charging their most loyal customers up to £234 extra a year.

Labour's Shadow Energy Secretary, Caroline Flint said: “Energy bills are £300 a year higher under the Tories. The number of families with children who cannot afford their energy bills is at a record high. Time after time, David Cameron has ignored warnings about rip-off energy bills, opposed Labour's plans to reform the energy market and create a tough new regulator, and let the energy companies get away with overcharging millions of consumers. Households and businesses cannot afford another five years of this.”

While true, Flint is not proposing to take radical action to break up the failed energy market. A market that has failed the most for the people who have the greatest energy need. Ofgem, the government regulator of the energy utilities is simply myopic and sees no other solution to the problem than providing even more market.

The Morning Star leader was typically direct, they said: “Ofgem's primary concern is not to advise Britain’s gas and electricity customers on how to obtain a better deal from their energy suppliers, but to maintain private ownership when even the dogs in the street know that the industry is one big racket.”

Philip Pearson at the TUC is more measured, but also points to the long term trends in his analysis. He says that customers who did not switch were more likely to be on low incomes, over 65, living in social housing and without qualifications. Customers on Standard tariffs were also more likely to be disabled, a single parent and struggling financially.

The CMA report has made it abundantly clear that the corporate-controlled energy system isn't working and we need a radical new approach.

 

Getting wind farm subsidy and planning right

The role of onshore wind in meeting renewable targets and Britain’s future energy needs has always been contentious. The IPPR has thrown something of a grenade into the debate with a paper that claims there is a loophole in the subsidy scheme that is costing the taxpayer dear.

Given the scale of customer financial support for wind generation it is important that subsidy schemes are cost-effective. However, a loophole in the feed-in tariff (or FiT) for onshore wind energy threatens to cost the taxpayer more than £400 million over the scheme’s lifetime, and to erode both public confidence in onshore wind.

The loophole identified by IPPR sees developers installing ‘derated’ turbines – turbines which are ‘capped’ so that they generate less energy. Turbines are derated in this way so that developers and investors are able to qualify for the more generous subsidy offered to lower-capacity turbines, generating 100–500kW. By installing derated turbines, developers are making larger profits off a feature of the scheme that was designed to support small-scale projects. Derated turbines are also physically larger than correctly rated turbines of the same capacity, and therefore threaten to exacerbate public concerns about the visual impact of onshore wind without providing any pay-off in terms of increased electricity generation.

IPPR believe that, at September 2014, almost half of installed turbines qualifying in the higher-subsidy 100–500kW band were derated. Even allowing for future reductions in the amount of this subsidy, they have calculated that each derated turbine will earn £100,000 in ‘excess subsidy’ each year, or £2 million over its 20-year lifespan. This means that, by September 2014, the British energy billpayer was already committed to £175 million in excess subsidy payments on derated turbines. Assuming the number of onshore wind turbines continues to grow at its historical rate, this total liability will swell to more than £400 million by the end of 2015, if this loophole is not closed.

IPPR makes three suggestions for change. Subsidy based on rotor size rather than capacity; a subsidy cap; and a new subsidy band to take away the incentive to exploit the loophole.

These revelations will strengthen the anti-wind farm lobby. An open letter, which calls into question the government’s judgement on large windfarm projects, has been signed by a group of rural protection groups including the National Trust for Scotland. It says the government, in backing large windfarm developments, has ignored its own advisors and failed to ensure windfarm plans have been laid open to “proper and democratic scrutiny”.

It also says: “It is vital that any decisions on the location of these developments rely on the fair and impartial assessment of all pertinent information and points of view. Unfortunately, we do not believe that the Scottish Government is doing this in a consistent manner with windfarm developments.”

As wind farms play such a major role in meeting our renewable targets, it is important that we get the subsidy and planning regimes right.

 

Ineos threats over fracking

Perhaps the least surprising energy story of recent weeks has been INEOS threatening the future of their Grangemouth plant if unconventional gas extraction (fracking) is not allowed in Scotland.

We were told at the time of the last crisis by INEOS that their business plan was based on importing gas from the USA. Many of us were sceptical, given the likely availability of shale gas so close to Grangemouth.

In fact in 2013 we warned, “The link with fracking is that his Grangemouth plant sits right in the middle of the central belt shale gas area. Using this gas would obviate the need to ship in shale gas from the states. We are bound to speculate that his next line will be to threaten (again) that without local gas the plant is no longer ‘viable’. Central belt residents – you have been warned.

Now, surprise, surprise, we are told by Ineos Upstream chairman Gary Haywood that buying in the gas from abroad was not a long-term solution. Speaking at a conference in Edinburgh, he said it would be feasible to get a shale industry up and running in the UK “within three to five years…… Can we do that efficiently enough to make Grangemouth make sense in the future? That is a real challenge.”

Ineos has bought licences for shale gas exploration across 700 square miles (1,126 sq km) of land in central Scotland, but the government moratorium has left a question mark over the future of the industry locally. When asked if the plant would have a future without an indigenous supply of gas, Mr Haywood said it would be “very difficult”. He said: “When you are shipping in material of that nature you are always at a disadvantage.”

Amazing that this wasn’t pointed out when Ineos was ‘selling’ us the 2013 plan and taking substantial amounts of taxpayers money. And let’s not forget that Ineos’s owner is another corporate who relocated profits to Switzerland to avoid tax.

MSP’s should not be swayed on fracking by the shifting sands that is the latest Ineos threat. There is a strong safety, environmental and economic case against fracking and that is the correct focus for legislators.

 

Global Divestment Day

If we are to save the planet for future generations, it's time to take action against the power and influence of the fossil fuel industry.

13th-14th February is Global Divestment Day. Thousands of people across 6 continents taking collective action to show the strength of the growing global divestment movement and demanding our institutions go fossil free. The call for action in the UK comes in the form of a series of events targeting the health, faith, university, local authority and bank decision makers, as well as personal and political action.

As a pensions negotiator, I recognise that occupational and personal pensions are an important part of the campaign. The Scottish Local Government Pension Scheme invests £26bn of our members money and too much of this has been invested in ways that are harmful to our members.

There are several reasons why pension funds should stop supporting fossil fuel companies including:

  • Climate change. The carbon emissions of coal are higher than for any other fuel in the world. Recent estimates show that the vast majority of the world’s coal reserves will have to be left in the ground in order to avoid devastating climate change.
  • Destroying lives in the global south. Coal mining is responsible for devastating local pollution in the global south as well as the displacement of thousands of people from their homes.
  • Carbon bubble. Banks and other financial players have created a carbon bubble in the global economy. Only a small fraction of fossil fuel resources can be burned without breaking international commitments to tackle climate change. This means most fossil fuel assets are worthless. A sudden correction of the current overvaluation of fossil fuel companies could cause a new global financial crisis.

These are all good reasons for those making investment decisions to divest, even under the constraints of fiduciary duty. Those of us lucky enough to benefit from decent pensions should ensure they are used for good, not evil.

Divestment has been used effectively throughout history to place social and economic pressure on an industry or government that is causing harm. By publicly withdrawing financial support, fossil fuel divestment addresses the root of the problem – the unchecked expansion of fossil fuel companies on an endless quest for profit.

There are a range of actions you can take today and tomorrow on the campaign website. Either in Edinburgh or online. The planet and our children require us to take climate change seriously. #divest

 

 

Renewables with realism

The amount of electricity generated by renewables in Scotland continues to grow. However, there have been setbacks for marine energy and the falling oil price also has implications for investment.

Renewables generated in Scotland has matched that produced from fossil fuels, although not nuclear, for the first time. Energy from renewable sources accounted for 32% of all electricity generated, equal to the output from oil, coal and gas. Nuclear power stations provided 34.9%.

The final 2013 UK figures also show Scotland continued to be a net exporter of power, with a record 28% being sent elsewhere, mainly to England. The key drivers of the overall rise were a 39% increase in hydro generation and 13% more output from wind.

In another boost to renewables, construction of the largest planned tidal energy project in the world is expected to begin off the Scottish coast. Atlantis, majority owner of the MeyGen project, said the project has the potential to power nearly 175,000 homes through a network of 269 turbines on the seabed at Ness of Quoys in Caithness, north-east Scotland.

However, Tony MacKay, of Inverness-based Mackay Consulants took a more critical view of the industry in the North East Scotland Economic Monthly Report. He also says Alex Salmond’s description of Scotland as the “Saudi Arabia of marine energy” may well come back to haunt him.

He says: “December was a bad month for Scotland’s fledgling marine energy industry, with problems at two of the leading companies. Pelamis Wave Power closed down, with the loss of another 16 jobs bringing the total to 56, and Aquamarine Power laid off more than 30 of their staff. “

He had been a strong supporter of the marine energy sector but had tried to take a realistic approach to its prospects; “That has been in marked contrast with the wildly overoptimistic forecasts of the Scottish Government, Highlands and Islands Enterprise (HIE) and Scottish Renewables, the industry’s representative body. “

He takes particular issue with the Scottish Government forecast that the marine energy industry could be worth £6.1 billion by 2035, creating nearly 20,000 jobs. He says there is a strong consensus in the industry that some tidal projects are close to becoming commercially viable, but that wave energy has made “very disappointing progress. “

Brian Ashcroft of the Fraser of Allander Institute, has also highlighted some further challenges for renewables in Scotland. He says:

“Scotland’s renewables industry could be affected quite badly if the fall in the oil price is sustained: it will become less price competitive and hence there could be reduced demand for renewable energy and less investment in the industry. It might also deter investment in future renewable technologies such as wave power. And Scotland might suffer disproportionately compared to the UK because of the relatively greater importance of renewables to the Scottish economy. Yet there is a view that oil and renewables are not strong substitutes. If that is correct, with oil primarily used to produce transportation fuels, and renewables primarily to generate electricity, then the impact on the renewables industry may be much less than some, including myself, had previously thought.”

So, while renewables are rightly making progress in Scotland, it remains heavily dependent on intermittent wind power. The next big step requires the development of other renewable technologies such as marine. That development has suffered some significant setbacks.

 

Scottish Water delivers again as a public service

Water charges in Scotland will increase by 1.6%, which is about £6 a year for the average household. This means the average Scottish Water household charge in 2015/16 will be £346.

Scottish Water, a public corporation, not the ‘company’ it keeps describing itself as, said that since 2009 its charges have reduced by 10% relative to the rate of inflation and are within price limits set by the regulator.

Charges pay for a £3.5 billion investment programme over the next six years which will further improve drinking water quality, protect the environment and support the economy and jobs in the construction sector.

Scottish Water chief executive Douglas Millican said: “Scottish Water continues to provide one of the UK’s best-value water and waste water services. Today’s announcement signals stability in water charges for the coming years and provides certainty for customers. Charges allow us to maintain investment – ensuring we continue to provide fresh, clearer drinking water for our customers while protecting and enhancing the environment and supporting the Scottish economy.

“It means that, by 2021, household bills will have fallen further in real terms – which is good news for customers the length and breadth of Scotland.”

Overall, in the six-year period from 2015-16 to 2020-21, Scottish Water charges must increase by no more than 1.8% below the CPI rate of inflation.

The capital programme helps provide clean drinking water and safely dispose of wastewater. A cause not helped by distilleries and golf courses who have been breaking environmental rules on water extraction as highlighted by Rob Edwards in the Sunday Herald.

The Scottish Environment Protection Agency (Sepa) has condemned the performance of distilleries and golf courses across the country as “poor” because they have broken the rules by taking more water than permitted. Farmers and other businesses have also come under fire. Sepa has further criticised more than 200 operators for failing to say how much water they used. They include more farmers, golf courses and distilleries as well as Edinburgh Zoo, Scone Palace in Perth and the US property tycoon Donald Trump.

So, Scottish Water remains a good example of what public service can achieve without the need to feed the profit motive. It’s just a pity they always want to hide their public service identity.

 

 

SNP running out of places to hide on fracking

It sometimes feels that fracking is the only energy issue in the UK at present. However, developments this week make it much less likely that we will see unconventional gas being used in Scotland or the rest of the UK.

Two weeks ago, here at Utilities Scotland, Dave Watson set out the shrewd politics behind Labour’s Smith Commission plan to devolve the licensing of onshore gas exploration – removing the Scottish Government’s ‘political fig leaf’. That was quickly followed by Jim Murphy’s pledge on a fracking moratorium in Scotland. He said:

“Scottish Labour would introduce a triple-lock system to halt any onshore fracking taking place in Scotland until environmental and health safeguards are in place. This involves:

•           A local referendum before final planning approval is given;
•           Halting any fracking in Scotland until the lessons of fracking in the rest of the UK are learned;
•           A comprehensive review of the baseline conditions before any planning application is granted; “

This was followed up by a UK Labour amendment at Westminster yesterday. Shadow energy minister Tom Greatrex MP said:

“Labour have tabled an amendment to the Infrastructure Bill that will stop shale gas extraction. It will mean that it cannot go ahead until the right protections for the public and environment are in place.”

Somewhat unexpectedly, this resulted in a spectacular last minute U-turn to save the UK government’s Infrastructure Bill. Energy secretary Ed Davey accepted the Labour amendment that stops fracking until 13 environmental loopholes in the shale gas regulations are closed. It seems that Tory and LibDem backbenchers recognised that local objections to fracking counted for more than the business interests they usually support. Anyone would think that an election was in the offing!

The SNP have spent the day desperately trying to highlight that MPs didn’t vote for their separate amendment. The very fact that they even tabled an amendment at Westminster is strange when the Scottish Government already has the power to ban fracking in Scotland. They did it for new nuclear power, but why not for fracking?

Part of the answer to that question came out in the Sunday Herald. The south Scotland MSP, Joan McAlpine, had protested to Nicola Sturgeon about the behaviour of the Scottish energy minister, Fergus Ewing, after he carpeted her for criticising the Duke of Buccleuch’s plans to mine coalbed methane at Canonbie in Dumfries and Galloway. She said Ewing’s undisguised support for developing underground gas was damaging the government’s credibility in communities across Scotland. Canonbie residents fear that they have been “sold out” in a “stitch-up” by the minister.

Utilities Scotland has also previously highlighted the actions of Ineos in buying up exploration licenses. It is inconceivable that they would have made that investment if they believed the Scottish Government was opposed to fracking.

If you cut through the political froth it simply boils down to this. The SNP has been trying to face two ways on fracking for years. Telling communities that they share their concerns, blaming Westminster when they have always had the power to block fracking here in Scotland immediately. They have now run out of places to hide and we await Fergus Ewing’s statement in the Scottish Parliament tomorrow with interest.

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Postscript.

Fergus Ewing announced a moratorium to allow for public consultation. The political pressure triumphed over the political games, when it became clear that the public now understood that the Scottish Government had the power to act. The Westminster blame game ran out of steam on this occasion. It remains to be seen how long this will hold, but it’s a fair bet that we won’t see fracking in Scotland this side of the 2016 election. That at least, is a result.

Why energy bills should be falling faster

Energy prices are back in the news as politicians call on the energy companies to reflect the oil price fall in their gas and electricity prices.

EoN were first out with a gas price cut, followed by British Gas and now ScottishPower. The Prime Minister claimed this undermined Labour’s price freeze, although just how a cap stops a price cut isn’t really explained. Ed Miliband described the 5% fall as “too little, too late” when wholesale prices were falling by approximately 20%.

As oil prices have more than halved, why haven’t the energy companies been quicker to pass on the savings to consumers?

It is certainly the case that wholesale reductions don’t have a similar impact on retail bills. Primarily because wholesale costs only make up half the average consumer bill. Only 30% of the gas in Europe is now bought on the price of oil, probably even less than that in the UK. Companies also buy a lot of supply in forward markets, up to two years ahead of use. In the longer term, companies will point out that the Autumn Statement says levies on energy companies are set to rise by £6.3bn over the next seven years.

However, falling prices do give some headroom for reductions and there is a suspicion that companies are defending their retail margins after the mild 2013/14 winter. Gas demand was down 10-20% last winter.

A 25% drop in forward wholesale prices for gas should drive at least a 10% cut in retail prices. Ofgem estimates that the supply margins of the Big Six have doubled in the last twelve months, increasing from 4% (£49) in 2013 to 8% (£105) today. The average household’s annual energy bill is now £260 higher compared to 2010 and the poorest 10% of households have seen their energy bills rise nearly twice as fast as other households. Hardly surprising then that Ofgem has referred the energy companies to the Competition regular stating: “We found that suppliers do not adjust their prices as quickly when costs fall compared to when wholesale costs rise… “. Typically masterly understatement from the toothless regulator!

We are also not seeing reductions on the scale expected because companies are more focused on share price than consumers. Every 1% off retail prices cuts around 5% off SSE’s earnings per share. Another by-product of a privatised industry. Smaller companies are able to respond to wholesale price changes more quickly because they have less risk. Another argument in favour of a more diversified ownership model that includes local authority energy generation.

Labour’s solution is to give Ofgem (or its replacement) the power to make energy companies pass on cuts in the cost of oil and gas to bill payers. Ed Miliband said: “Let’s reduce energy bills for consumers. We can do that as well as having this freeze to make sure energy bills don’t rise.”

The SNP has not taken a strong line over the energy companies, but instead have been calling for an increase in the Winter Fuel Payment. Chic Brodie MSP said: “Energy bills have increased by over 37% since 2000-01 and if winter fuel allowance had increased by inflation since 2000-01, pensioners would be £76 better off in 2014-15 than they are”. This allowance is to be devolved to Scotland under the Smith agreement.

Whatever the economics say, Miliband and Osborne both calling for price cuts is going to keep the energy companies spin doctors busy in the run up to the General Election.

Fracking – over to you!

Some astute politics by Labour and Tom Greatrex MP puts decisions on fracking very firmly in the Scottish Government’s court.

The Smith Agreement proposes the devolution of licences for gas exploration. The political significance is that the Scottish Government Energy Minister, Fergus Ewing, has used the UK government’s plans on underground access rights, to give the impression that he opposes fracking.

This is simply a political fig leaf, as I explained in an article last November in Utilities Scotland; “Scottish Government already has planning powers that could end the prospect of fracking in Scotland now. They have used these powers to stop new nuclear power stations, but not fracking. Simply put, Ineos are making this level of investment because they are confident that the Scottish Government is not going to stand in their way.”

Labour MP Tom Greatrex pressed home this point by lodging amendments to the Infrastructure Bill requesting that full powers over shale gas exploration be given to the Scottish Parliament ahead of the general election. The coalition government did not back this as such, but instead pledged to exclude Scotland from the impending legislation.

Tom Greatrex said:

The Tory-led Government have belatedly conceded Scottish Labour amendments to force the devolution of the remaining secondary parts of the framework for shale gas in Scotland, effectively implementing these parts of the Smith Agreement prior to the general election.

“Whilst some in Holyrood would like to pretend that the Scottish Government is powerless to act over fracking, the truth is that already nothing can happen at all in Scotland without the approval of ministers in Edinburgh. Their control over the planning and permitting regime gives the SNP ultimate responsibility and an effective veto for shale gas extraction in Scotland.

“But in the context of devolved planning and permitting regimes, it makes sense for underground mineral access rights, which are essentially a secondary aspect of the planning process, should be devolved as well. Labour have won a major concession from the Government on this point, who will now exclude Scotland from changes being made in the Infrastructure Bill.”

Of course Scottish Labour isn’t opposed in principle to fracking either and has instead said it cannot go ahead unless we have a system of robust environmental regulation and comprehensive inspection. However, they are not the government making this decision.

Friends of the Earth Scotland Director, Richard Dixon put it well in his recent opinion piece in The Scotsman: “Circumstances are conspiring to ensure that in the next few months, the SNP will have to come off the fence and either decisively stop the unconventional gas industry north of the Border or admit that they are happy to let big companies like INEOS drill and frack significant parts of Scotland.”

Indeed, when you run out of others to blame – for government’s, real politics can sometimes be very difficult!

 

 

 

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