A decision by the U.K. energy regulator to investigate the utility industry threatens to delay investment in power generation in the next four years, adding to the risk of blackouts around the time of the next election.
Regulator Ofgem has asked the Competition and Markets Authority to start an inquiry that may force a breakup of utilities’ operations, a process that will take at least 18 months. Companies may be reluctant to invest in infrastructure while the investigation runs, creating an unavoidable “capacity crunch,” according to Liberum Capital Ltd.
The U.K. is shutting electricity plants faster than it is building replacements. Prime Minister David Cameron’s government is pushing for more investment in power generation as the Labour opposition vows to freeze customer bills if it wins the election that must be held by the middle of next year.
The inquiry “will create uncertainty over the U.K. energy market and potentially deter investment,” Edmund Reid, an analyst at JPMorgan Securities Plc, said in an e-mailed note. “With a general election due in May 2015, there is likely to be an investment hiatus anyway.”
Any delay in bringing on new generation will raise the risk of power shortages. Capacity margins are expected to drop to below 2 percent in 2016 and 2018 from 18 percent in 2010, according to data from Ofgem.
Coal-fired plants totaling 13 gigawatts are at risk of closing by 2019, according to the Confederation of U.K. Coal Producers in Wakefield, England. That’s in addition to the 8.2 gigawatts that were shut in the past 15 months.
Ofgem said it took the investment environment into account before deciding to move forward with the investigation. It’s responding to concerns across all political parties that profits from selling power and natural gas have risen fivefold from 2009 to 2012 with no clear cost reason to do so. Consumers are shouldering the burden by paying higher bills.
“We don’t take the decision to make a market-investigation recommendation lightly,” Andrew Wright interim chief executive officer of Ofgem, said on a conference call. “It does provide additional uncertainty, but it is important to recognize we aren’t starting from a base where there isn’t any uncertainty in the market today.”
There’s an increasing risk of blackouts in the U.K. because building new gas-fired power plants takes years and the review will delay work, Sam Laidlaw, CEO of gas and power provider Centrica Plc, said on BBC Radio 4.
Energy Secretary Ed Davey rejected that suggestion, saying investment in the power industry is rising and that the U.K. is maintaining safe margins between supply and demand.
“The lights are going to stay on,” Davey said in an interview on Radio 4’s “Today” program. “We’re seeing record levels of investment in this industry.”
Utilities have been criticized for raising retail prices faster than inflation, a move the industry attributes to increasing gas costs and levies designed to reduce fossil-fuel emissions.
Electricite de France SA, RWE AG’s British unit Npower and EON U.K. -- three of the country’s “Big Six” utilities -- said they welcome the competition inquiry as a way to restore public trust in energy companies.
“We have already made a large number of changes such as running our businesses separately,” EON U.K.’s CEO Tony Cocker said in a statement. His counterpart at Npower, Paul Massara, said March 25 he supports more “ringfencing,” or splitting of business divisions, without a “forced unbundling or sale.”
SSE Plc, which with Centrica and Scottish Power Ltd. rounds out the six biggest utilities, said yesterday it intends to freeze power and gas prices and split its retail and wholesale units before Ofgem takes action.
The criticism of utilities’ profits has inflamed political debate over living costs, with Cameron’s government pledging to make it easier for customers to switch suppliers.
The review announced today “confirms the energy market has failed,” said Caroline Flint, the Labour member of parliament who shadows Davey on energy policy.
“What we cannot have when an industry is not working is a company like Centrica and Sam Laidlaw having us over a barrel,” Flint said on Radio 4. “Energy companies have been making substantial profits. Nobody can separate out what is happening.”
The investigation is the first for the U.K.’s new antitrust authority, the CMA, which formally starts work in April. A previous probe into gasoline sales by regulators led to no action after officials concluded competition was working well.