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6
infrastructure
investor
may
2014
NEWS ANALYSIS
MONTHLY COMMENTARY FROM
INFRASTRUCTURE INVESTOR
SENIOR EDITOR
ANDY THOMSON
g r o u n d wo r k
Flagging energy
“Vertical disintegration” sounds
not entirely unlike the “conscious
uncoupling” euphemism used by
celebs Gwyneth Paltrow and Chris
Martin to describe what those
unfamiliar with New Age wisdom
may instead refer to as a split-up or
divorce. Indeed, splitting up is pre-
cisely what vertical disintegration
also implies. In the UK energy con-
text, itmeans companies no longer
being able to own both the supply
arms, which sell power to consum-
ers, and the generationunits, which
own the power plants.
The issue is topical because
of UK energy regulator Ofgem’s
announcement that it intended to
place a market investigation of the
sector in the hands of the Competi-
tion andMarkets Authority (CMA).
Ina statement,Ofgemsaid it hoped
the investigation – prompted by
claims of consumer mistreatment
at the hands of the “big six” energy
companies – would “once and for
all clear the air” and “complement
our reforms for a simpler, clearer
and fairer energy market”.
Some of the “big six” appeared
happy with this outcome (remem-
bering, of course that appearances
can be deceptive). E.ON UK chief
executive Tony Cocker, for exam-
ple, said the investigation was “the
only way to restore full public con-
fidence to the energy sector and
depoliticise the whole issue”.
Vertical disintegration, mean-
while, was addressed by fellow big
six firm SSE in a timely announce-
ment that it would split its retail and
wholesale activities just a day before
theOfgemreferral (together with a
promise to freezehousehold energy
prices until January 2016).
For infrastructure investors with
an appetite for generation assets,
the prospect of vertical disintegra-
tion in theory presents both oppor-
tunity and threat. If the energy
companies conclude that they will
be forced to sell generation assets,
many of them may end up in the
portfolios of funds and institutions.
But it may take some time before
the assets change hands – before
which, therewould likely be a fallow
period in which the energy com-
panies (and would-be fund/insti-
tutional co-investors) may well shy
away from investing in assets they
won’t get to hold for the long term.
Looking more broadly at the
impact of the referral on investor
sentiment, it seems bound tohave a
negative effect on the perceptionof
regulatory risk. Sources canvassed
by
Infrastructure Investor
say this risk
is being factored into pricing today
to an extent not seen before in the
UK. Added to the protracted imple-
mentation of electricity market
reforms arising fromthe 2012-2013
Energy Bill, the status of the UK
as an investment “safe haven” for
core infrastructure investors appears
increasingly questionable.
Further uncertainty surrounds
what will happen if the May 2015
general election delivers a Labour
government committed to a
20-month energy price freeze and
hinting strongly at the abolition of
Ofgem and its replacement with a
new regulatory structure. One ques-
tion occupying minds is whether
Labour would wait for the CMA
review findings to be published
(expected in 2016) before pressing
ahead with their own plans.
BALANCING ACT
For the coalition government trying
to balance the promotion of invest-
ment and supply security with the
need to address consumer anger
over rising prices, Ofgem’s latest
move is unlikely to provide a squar-
ing of the circle.
“The inquiry will not be a magic
bullet to deal with the conflicting
agendas pulling the government in
different directions,” Mark Jones, a
partner in law firm Hogan Lovells’
antitrust, competitionandeconomic
regulation practice, told us recently.
Call it uncoupling, disintegration
or another word of your choice: the
strains on the relationship between
investors and theUKenergy industry
arebecoming increasingly evident.
n
e:
“The status of
the UK as an
investment “safe
haven” for core
infrastructure
investors appears
increasingly
questionable”
An investigation triggered by the regulator will cloud
investment in the UK with further uncertainty
