Yes, my energy company makes a profit. So what?

Time for a more objective debate.

Last week the Labour Party released figures highlighting that the major energy companies collectively had made increased profit levels from their generation and supply businesses since the last general election.  This theme is one that requires an objective public debate as the UK faces up to the energy challenges that lie ahead.

I understand that some people, many of whom may be Labour Party members, believe that utilities – like the company I lead – should never have been privatised and so any level of profit is unacceptable.  That’s a perfectly legitimate view to hold, but it is not the policy of any leading political party.  For as long as energy companies are privatised and shareholder-owned companies we are required to pay our shareholders a return on their investment.

That being so, surely the real question – if I may be so bold – is: what level of profit is reasonable for a publically listed energy company to make? Clearly we provide a vital service and so we cannot make unfettered profits.  But we have been very clear for some time now that in domestic energy supply we target a profit margin that averages just five per cent over the medium term.  Recent polling suggests that most people think that is a reasonable amount to make. Indeed, it’s a smaller margin than most food retailers and in recent years our Energy Supply business has made less than that. The overall profits might seem high, but they come from almost ten million customer accounts.

Labour looked beyond supply and also examined the generation side of our businesses.  It’s true that profit margins here can be higher but they are absolutely necessary to support inherently riskier, more complex investments like power stations. And why do we need that investment? To deliver on the energy policy commitments of this government and the ones before it.

For years now energy policy has been aimed at decarbonising the UK’s energy system. The Climate Change Act of 2008, supported across the political spectrum, requires slashing carbon emissions by 80 per cent on 1990 levels by 2050. To do this without drastic changes to all of our lifestyles, most of the burden of this will fall on the electricity generation sector, where highly polluting power stations will have to close and be replaced with more expensive, low-carbon alternatives. I don’t disagree with this aim – quite the opposite – but politicians, the media and indeed the general public must all confront the fact that these policies come with a price tag.

Once you bring in necessary upgrades in the regulated transportation infrastructure, oft-quoted government estimates put the amount of private sector investment needed by 2020 at as much as £110bn. Whatever the final sum, it will require an awful lot of investment decisions to be made. And if each individual investment does not stand alone economically, it cannot be undertaken. Therefore the sheer increase in volumes of this investment will mean that, even if profit margins per investment are not increasing, the absolute level of profit will have to increase. It is a simple fact of economics.

Where the profit then goes is also critical. At SSE we are proud to invest only in the UK and Ireland, and we use the British supply chain where we can too, such as the £500m we put into it when developing our Greater Gabbard wind farm off the Suffolk coast. As a UK-listed company we pay tax on our profits here in the UK (£369m last year), we employ around 20,000 people across the UK and Ireland – many in remote areas where such jobs are invaluable to the local economy – and we also invest in R&D, skills, training and apprenticeships.  

I accept we have a unique role in the UK society and with that privilege comes responsibility. I have also been around long enough to know that Labour’s focus on the big energy companies is a fact of political life in a functioning democracy, but this over-simplification of profits failed to take account of how this profit underpins vital investment and services that help the country to function.  I am not pretending SSE or other companies are perfect, but that must not stop us from having a genuine debate around the future of energy in the UK and how we are going to pay for it through proper economic investment.

For customers, higher group profits will clearly be difficult to reconcile with the increases they have seen in prices in recent years. But this debate is too important to be reduced to just prices versus profits. For all the investment we make, we estimate that only 15 per cent of a typical bill is within our direct control. It’s time for government, opposition and industry alike to have an open, objective conversation about how to meet the challenges ahead of us while protecting customers from rising costs.
 

Photograph: Getty Images

Alistair Phillips-Davies is Chief Executive of SSE plc

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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