Bombshells, vandalism and stand by generation

Last week was certainly an eventful one in the world of UK energy policy and given the last few years that we have had that is certainly saying something. After a quiet start Ed Milliband dropped his bombshell of a twenty month retail energy price cap. This strikes me as policy making at its worst. There are three problems with it.

 Firstly, it seeks control of the end user price of a commodity without doing anything about the underlying costs and leaving retailers at the mercy of trends outside their control. We are obviously all concerned about high energy prices but attacking retailers fairly low profit margins is missing the target by a long way. By my reckoning over the last few years retail margins have been, at the most, the fifth biggest contribution to rising energy prices, if that. They certainly rank well behind 1) the global and well documented rise in wholesale energy prices; 2) increases in network charges which are the subject of independent price control regulation; 3) the relentless rise in government imposed costs on clean generation and energy efficiency; and 4) upward pressure on overheads as suppliers prepare for smart metering and the green deal. Government directly controls one of these (number 3) and heavily influences another (number 4) but Miliband decided to target all his guns on the margins.

Secondly, Governement mandated price freezes don't work as all the evidence from the 1970s suggests. How soon we forget. They produce distortions in the market, create sub optimal behavior on the part of both customers and suppliers and only delay the inevitable. King Canute springs to mind. They are notoriously difficult to implement. Let me illustrate with a simple example. Industrial customers typically sign multi year energy contracts which frequently have price variation clauses in them to deal with the uncertainties facing both sides. Is Government simply going to tell willing buyers and sellers that they can't trade the ways they want to.

Thirdly, whatever politicians may think and assert, there is, and always has been, a link between levels of investment and levels of profitability. If Mr Miliband thinks that he will get the investment needed to largely decarbonise the UKs electricity industry by 2030 (I happen to believe this is a good goal by the way) and at the same time drive a substantial segment of the industry into artificial losses then he is living on a different planet than the one I occupy. The businesses of the production and supply of energy are largely owned by the same companies and are certainly financed by similar investors. What affects one part of the energy industry naturally affects the other bits. Politicians seem incapable of understanding that the investment climate is a fragile thing and the ructions of last week will have undermined confidence throughout Board rooms of Europe.

I don't know how it will all play out but the energy supply business will become even more dysfunctional and  the UK's generation capacity crunch will be deeper and longer than we thought a week ago. If Mr Miliband gets his heart's desire and is given the keys to Number 10 Downing Street in 2015 his first task should not be to hold a press conference or appoint a cabinet but check the stand by generators work. 

Kings, film stars, pop songs and scientists

I have been reading the latest edition of 'Science Scotland' published by the Royal Society of Edinburgh. Its focus is on earth sciences which in many respects were born in Scotland with the publication of James Hutton's 'Theory of the Earth' in 1785.  This tradition is carried on by the Scottish Universities Environmental Research Centre (SUERC) who do an astonishing range of work. One page of the magazine gives a summary of some of the more popular work.

1. Dating Kings. The SUERC used it accelerator mass spectrometer to carbon date the bones found in Leicester which indicated that the individual died between 1475 and 1480 confirming that the remains were indeed those of Richard III. I find it amazing that we can be that accurate after over 600 years and I can't even remember what I did last month.

2. What killed the dinosaurs. SUERC was part of an international team that confirmed the extinction was precisely 66,038,000 years ago, exactly the same time as an asteroid or comet hit the earth. Where was Bruce Willis when he was needed. (A reference to the film Armageddon if you were wondering).

3. Space invaders. A team are about to try and answer David Bowie's question by examining a fragment of a Martian meteorite. 

4.  More than just a granite chin. Scientists from Aberdeen and SUERC have recently discovered that 1.5 billion years ago, granite played a key role in creating life as we know it, prompting the shift from simple to more complex organisms. We all know why Aberdeen University played the leading role!

The frontiers of science are incredible. 

Cancer centres and clean shoes

I have been involved with the Maggies Cancer Centres charity for a number of years, more recently as a Board member. The charity is mainly involved in building drop in centres that are next to oncology facilities to help more people affected by cancer live better lives. My involvement has shown me the role that architecture and design can have on well being and Maggies Centres are all well designed and visually distinctive. Each one is different but they are all, fundamentally, based around the kitchen table. 

The charity started 17 years ago in Edinburgh and this week I attended the opening of the 17th centre which is in Aberdeen. It has been designed by a Norwegian firm of Architects and so was formally opened by the Queen of Norway (hence the need to polish my shoes) along with the Duchess of Rothesay (as the Duchess of Cornwall is known in Scotland).  It is another striking building and I was very taken with the use of natural light and local materials. The centre also celebrates the links between Scotland and Norway and the oil and gas community were out in force as they had played, together with the golfer Colin Montgomerie, a major role in the fund raising. 

I have visited a number of centres over the last few months and know that the latest addition will make a real difference to people's lives in the North East of Scotland.

Beyond the numbers

Many years ago I qualified as a Chartered Accountant and have maintained my membership of the relevant institute, the ICAEW. In my new more relaxed existence I have started to pay more attention to it and even visited their premises in London earlier in the month. I came across one of their recent publications 'What Should Companies be responsible for?'. It is meant as a discussion piece to stimulate debate. The old school answer would be 'to make money for shareholders' but, I believe, as apparently does the ICAEW, that life isn't that simple any more. It proposes four responsibillties.

1. Achieving a business purpose. I agree that this is fundamental and in my old life that purpose was 'to provide the energy people need in a reliable and sustainable way'. The article puts it this way

" A company needs to achieve a business purpose which stakeholders can understand. It may be, in the case of a retail bank, to offer financial services suitable for its customers or, in the case of an energy company, to supply energy on a reliable and sustainable basis. Stakeholders including employees, customers, suppliers and lenders, as well as shareholders, all expect companies to achieve their business purpose. Serving its purpose effectively generally enables a company to generate continuing profits and value for shareholders. However, generating profits and shareholder value is not in itself a sufficient business purpose for a company."

2. Behaving in a socially acceptable way. Of course the definition of what is socially acceptable changes but businesses have to have regard to accepted norms and standards but business also has to take a longer term view than the media or politicians might.

3. Meeting legal and regulatory requirements. Enough said.

4. Stating how responsibilities are met. I would prefer being transparent and being prepared to be held to account but the sentiment is the same.

It is good to see accountants going beyond the numbers and tackling some difficult philosophical issues and their list is a good starter for four.

Science and soda.

We had the second 2020 Climate Group lecture last week. This one was on the science around climate change. We had two boffins, Stephen Belcher from the Met Office and James Curran from SEPA, who did an excellent job in explaining the current scientific views and evidence on climate change. For example a lot of work is now being done to understand what climate change means for the occurrence of extreme weather events. The one event illustrated was the heat wave of 2003 where the statistical analysis suggests it was twice as likely to happen now than it was before the industrial era. The general consensus was that we can expect extreme weather events, like heat waves and floods to happen more regularly. This seems to be true anecdotally but it was good to hear it being backed up by experts.

I'm afraid that I brought the evening to a close with a slightly more mundane illustration. The increasing layer of greenhouse gases means we are trapping more energy in the atmosphere. And if you want to know what happens when you put more energy into a volatile system, try giving a toddler some Irn Bru! 

Thank you for the music

Contrary to popular belief I do occasionally read books with a lighter theme.  I have just finished one I really enjoyed. It's called 'The People's Songs' by Stuart Maconie and the sub title, 'The Story of Modern Britain in 50 Records' really does explain what the book does. Starting with 'We'll  meet again' it describes our history since World War Two through popular music. It really was the history of my life with its own soundtrack. A few of the chapters, each one is about a specific song and theme, really stuck home. Describing the industrial unrest in the late 1970s and early 1980s using 'Part of the Union'  by the Strawbs, the Cold War with 'Two Tribes'  by Frankie goes to Hollywood and the dawn of New Labour with 'Things can only get better' may seem obvious but they are still really vivid memories.

The book also brought other things to mind like David Bowie's appearance on Top of the Pops on 6 July 1972 when his performance of 'Starman' was genuinely ground breaking or Elvis Cotello's evocative song, Shipbuilding, about the Falklands war. Those chapters reminded me strongly about school and university respectively. He didn't mention 'Rip it up' by Orange Juice which was being played around the time I did my finals and seemed to foretell a nightmare exam which, fortunately, never came. 

The book as a whole does remind you of how big a part music plays in both our lives and our memories. We all enjoy coming up with lists of songs and Maconie's list of ones to describe our recent history is a good one.

It's all in the game

Sometimes I am lucky enough to be invited to interesting dinners and this week was one of those happy occasions. The group of about a dozen was a mixture of senior businessmen and women and some elite athletes. They included a wheelchair racer, an Olympic hockey player, a gold medal winning rower and Gianluca Vialli, the ex Chelsea player and manager. What made it an interesting evening and one that went on longer than expected was that we were discussing the lessons to be learned between sports and business and it was very much a two way debate. Over three hours we covered things like:

-creating the time and space for the really important decisions which also needs the ability to step back and reflect. This was from Vialli who had learned the lesson from Sir Alex Ferguson but it reminded me of similar advice I was given as a young CEO.

-the mental attitude of the players in a team; be it sport or business, can make all the difference between good performance and winning performance.

-how do you tackle poor performance. Of course in sport, performance measurement is relentless but what about poor behavioural performance?

-the difference between strategy and tactics, particularly the ability to change tactics in the middle of a game or race depending on the circumstances or the actions of the competition.

-the importance of post performance review. How many businesses would sit down the day after a Board meeting with a video analyst going over every discussion and every decision?

And the evening started off with an interesting aside. One of the other guests was someone I had worked with in the early 1990s and we hadn't seen each other for over twenty years. She recognised me but I had to be given some pretty heavy clues, a sign of a fading memory perhaps! 

Reflections on a career in Energy

At Brokers  conference of investors I attended earlier in the week, in my speech I  took a more reflective stance than normal and looked back at a career of nearly 25 years in the Energy Industry. I first considered it as an industry back in 1988 when I was offered a secondment to the old Department of Energy. A lot of change has happened over those 25 years and if privatisation was the birth of the industry Then I believe there have been four phases in its life so far. 

1.  A blissful and happy childhood from 1990 to 1994 mainly marked by a search for identity and the beginnings  of a more commercial approach to life.

2. A troubled teenage existence. It started with a vengeance on 14 December 1994 with the hostile Trafalgar House bid for Northern Electric. The next ten years saw every variety of corporate transaction with some assets changing hands on a regular basis. As well as M & A hormones running wild this era also saw competition emerge in all parts of the energy supply industry and network price regulation settled down.

3. At some point in the mid 2000s the industry started to resemble a young adult with new pressures and responsibilities. I named four; decarbonisation, affordability, security of supply and economic head winds. These combined to bring the industry crashing back into the political spotlight and it was not a comfortable place to be.

4. This pressure lead to the inevitable mid life crisis and we seem to be stuck in this mode. Some of the features of that crisis include a lack of political philosophy underpinning the industry and the direction of policy, a stasis as far as building generation plant is concerned, the lack of an honest debate about energy prices and a breakdown in trust between customers and suppliers and also between investors and companies on one hand and politicians and regulators on the other.

This is a sad state of affairs because energy is the lifeblood of a modern economy and the current mid life crisis could have serious consequences if it continues for much longer.

So I guess I was both more reflective and more pessimistic than usual. 

An injection of energy

After a couple of months away from both the city and the energy industry, this week I attended a brokers conference on European and UK energy, mainly because I had agreed to speak. It gave me a fresh injection of energy related information. I will address my address later but thought I'd set out some things that grabbed my attention from other speakers.

The first talk was from Anne-Sophie Corbeau from the IEA who looked at the global gas market. I missed the first part of what she said but was struck by how global the gas market is but how local some of the issues and questions are. For example, Australia is building seven different LNG plants but will they all start up on time and where will that gas go? The US is experiencing a boom in shale gas production which has pushed prices down. Will the US start exporting significant gas? Will domestic US demand increase? Will US prices stay low? Her view was that shale gas in Europe would not be material over the next five years. There is a lot of optimism in the promises from the industry but it is likely to be more difficult and take longer to see large production volumes. I wonder if thats right? China is the big swing factor with by far the fastest growth in demand (estimated to be over ten times the volume increase that might come from Europe) pulling in one direction and the prospects for Chinese shale gas production potentially pulling in the other. Which way will the pendulum swing?

The second speaker was Stuart Ffoulkes who is an expert on the German generation market. I'm afraid I didn't pay full attention given my lack of knowledge on Germanic energy issues but a couple of sound items caught my attention. Firstly, apparently, the German approach to energy efficiency is that no German child should know what a draught is by 2020. Secondly, the best way to see whether German power plants have actually closed is to read the blogs of train spotters to see what coal hauling trains are being decommissioned or watch for YouTube videos of chimneys being blown up.

Then it was the turn of a panel who discussed the future of electricity capacity markets in Europe. For some reason the analogy that seem to dominate the session was 'stripes on a zebra'. I pointed out that there are two species of zebra, the grevy and the plains and they don't interbreed. There is a real danger of the same happening with capacity markets in different countries.

Here is a gratuitous picture of a grevy zebra I took this summer.

The last speaker who wasn't me was Nick Winser. He pointed out the enormous transformation in the UK gas market in the last ten years with over fifty percent now being imported. He also explained the UK's approach to decarbonisation in a way I hadn't heard before. We are transforming the electricity sector from a carbon intensity of around 500 grams of carbon dioxide per kilowatt hour of energy produced to an intensity of less than 100 grams and then we intend to migrate the heat and transport sectors to electricity to get them down for their current levels of around 200 to 300 grams per Kwh. It makes the order of action clear and also illustrates the scale of the task facing the electricity industry.

I will finish with one last quote from the conference. 'When politicians talk of market failure they usually mean the market isn't doing what I want'. How true. 

Should Governments go digital.

Wearing my 2020 hat I met IBM recently to discuss how the digital revolution is affecting public services. Their central thesis was that the agenda of most governments, at most levels, is on three things:

-cost efficiency. Austerity and value for money are hitting almost every country to varying degrees and the bigger the pressure, the greater the need for innovation in the provision of public services.

-transforming services. As digital revolutionises the customer experience in many different industries governments are finally joining in.

-revenue improvement. This is often simply about governments collecting all the taxes they currently levy rather than finding new taxes. 

All of these three are underpinned by three other things, security, job creation and environmental issues. 

It is clear to me that the changes brought about by the digital revolution can assist government in all three of its key agenda items. We all know that on line and digital transactions are significantly cheaper than traditional paper based systems. The State of Utah in the US is already offering over 1000 services on line and citizens get a slicker and better experience. In this last area I was staggered to learn that UK citizens owe the UK government around £25bn in unpaid levies, penalties and fines. Often this is as a result of a lack of joined up data. Many companies are trying to get a single view of the customer but no government has anything like a single view of the citizen.

I heard of some great examples which tend to be from medium sized cities in the 1 to 5 million population range or small countries (again in the same sort of size range). Here are a few.

1. The website dublinked has brought together business and the public sector to experiment with digital across the whole greater Dublin region. I went on line and planned a journey on public transport from a pub in the city centre to an office on the outskirts (I know most people would be interested in the opposite journey). It is an interesting example of the public sector using partnerships to pilot and trial things. 

2. In Lyon the municipal government has devolved a city wide traffic monitoring and prediction system. Most of our roads and streets are well monitored but Lyon have brought all that data together, used it to predict patterns up to an hour ahead and then made these predictions available to the travelling public. That allows you to make better decisions about when to leave and what route to take.

3. A lot of Cities around the world are using low cost chips to monitor whether public parking spaces are available. Some local governments  in the UK are just starting to move in this direction.

4. A Norwegian utility has teamed up with local government to use smart metering to keep vulnerable people in their homes for a year or two longer, reducing the burden on social services. The technology already exists to allow you to get a text if your aged parents don't boil a kettle for their morning cup of tea because they always do, don't they, and if they miss a morning something may be wrong.

5. IBM itself is using its Jeopardy playing computer, Watson, to assist in prescribing treatments for cancer patients. It searches vast amounts of data to give up to date and targeted advice both saving costs on unnecessary treatment and more importantly increasing the chances of successful outcomes. I intend to follow this one up given my involvement with the Maggies cancer charity. 

6. The city of Sunderland is focussing on the digital agenda and data to incubate social enterprise and create meaningful employment opportunities. 

I am convinced that by embracing the possibilities offered by all things digital then Governments can  make progress in all their key objectives and, as far as the 2020 group is concerned also reduce carbon emissions in a meaningful way. As a group we are starting to discuss how we could help Scotland do this. Any ideas welcome.

Even corporates can think laterally.

Last week I heard of one of the most bizarre diversifications I have ever come across.  I haven't been able to verify the truth of the story but, if true, it shows a remarkable level of imagination. Apparently, using the key competencies gained in building the metal frames for car seats a company in the West Midlands is now a large manufacturer of body piercing jewellry. A marvellous example of corporate lateral thinking.

A blog about bogs

In my role as Chairman of the 2020 group I attended a dinner on peat. Not normally the subject of meal time conversation, I know, but a vital and largely ignored topic. Peatlands are one of the worlds greatest natural stores of carbon but, in the past, man's activities have generally caused this landscape to degrade substantially. The UK, and Scotland in particular, has a lot of peatland with an estimated three million hectares or about 12% of the total UK land mass. That stores around three billion tonnes of carbon dioxide and could be absorbing another 3 million tonnes each year. However, all the sins of the past mean that the peatland is actually releasing about 10 million tonnes each year rather than storing more. That's a 13 million swing which is about 30% of Scotland's annual emissions. 

The experts reckon it would cost between £250 and £400 per hectare to restore the peat bogs to their former glory and then maintenance and monitoring would be about £4 to £5 each year. The carbon saving is around 4 tonnes per hectare per year. I reckon that gives a pretty low cost of reducing carbon. My maths suggest that over, say, a twenty year period the saving would be 80 tonnes at a total cost of up to £500 which is only just over £6 per tonne. 

However, there is a problem and that is what the dinner was about. How do you create a market for this service so that people who want to pay to reduce carbon emissions can invest in peatland restoration as an alternative to other forms of sequestration such as forestry or as an alternative to high cost zero carbon energy? What value would businesses place on the carbon saved? Over  what time frame should investments be measured; I used twenty years in my simple example but for many businesses that is an eternity. So what is the right period? How do you ensure that the work is done properly and that claims of emission reductions are more than just greenwash? How do you resolve the competing land use claims? And all that before we got to dessert!

The International Union for the Conservation of Nature (IUCN) is drawing up a peatland code and the RSPB has some great case studies involving the Flow Country (the common name for the peat bogs of Caithness and Sutherland) but the reall prize is to get businesses involved to test out the processes  and bring market principles to bear. The challenge is, I believe, to turn Scotland's peat bogs from emitters to absorbers by 2020. It can be done but will need the collaboration of Government, business and civil society.