Can contractors working in the energy infrastructure sector survive the fallout from Ofgem’s competition review?

Joey Gardiner

Last week’s decision by energy regulator Ofgem to refer the actions of the “big six” firms to the competition authorities is just the latest blow to contractors working in the competitive energy infrastructure sector.

Because, like the cloud of Saharan dust also looming ominously over the UK this week, the competition review, which could see the energy companies broken up, threatens to make it both difficult for those companies to see much beyond their noses, and bring serious health risks for any who are too active.

In plain speaking the big six – who are some of the largest of all clients to the UK construction sector - don’t know if their businesses will exist in their current form at the end of the two years the review is likely to take. If they invest heavily in new projects now, they can’t know if they may be forced to sell them before they’re complete, bringing serious a risk that they won’t be able to recoup their investment.

As we report this week, the likes of Centrica and SSE have already responded by reining in their development programmes, and analysts are warning that the move will see a further two-year hiatus in the bringing forward of development plans for energy generating infrastructure.

And with the UK heading toward a 25% risk of blackouts by 2015/16, this is profoundly unhelpful. For construction firms specifically, it is also deeply depressing. Because current investment in energy infrastructure, while it has grown rapidly in recent years, is still happening at far less than half the rate necessary to meet the government’s plans to see £110bn invested by 2020.

This isn’t to say energy market reform isn’t necessary. But the government has spent the last five years totally reinventing the way the energy market works in order to encourage investment through its Electricity Market Reform process. This works by effectively guaranteeing generating companies return on their investment whatever the demand turns out to be. However, its labyrinthine complexity, and the delays working out the final details, mean it has only had limited success in bringing in investment so far.

Current investment in energy infrastructure is happening at less than half the rate necessary to meet the government’s plans to see £110bn invested by 2020

So for the competition authorities to review the industry now, after this process has been set up, is a classic case of putting the cart before the horse: if the energy industry was (or is) dysfunctional, this should have been addressed in advance of contriving an elaborate system of subsidies to get it to behave in a certain way, not afterwards.

There are those who accused Ofgem of bowing to political pressure with the timing of its announcement - timing which is convenient for a coalition government keen to neutralise Labour’s attacks on so called “profiteering” energy firms.

Whatever the truth, the whole situation highlights what happens when a market becomes a political football. Good sense can go out the window, and reasoned policy-making is very hard to find.

All of which tends to support the contention of Sir John Armitt, and others, that some way must be found to protect long-term infrastructure decision-making within the political process. Furthermore, the government
needs to take a more direct role in major energy infrastructure.

The fight over the future shape of the energy industry may be being carried out for all of the best reasons and result in a better functioning industry, but there is no doubt that wider issues around infrastructure construction need to be tackled to ensure that construction isn’t an innocent bystander caught in the crossfire.

Joey Gardiner, Building deputy editor