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Centrica restructure

Issues affecting electricity generators and the energy market as a whole.

 

Centrica restructure plan unveiled last week marks an end to the vertical integration strategy of its previous chief executive and an overdue focus back on retail customer service.

It seems right to follow the last two blogs on the CMA review; which has put the Big Six in the spotlight and look set to force them to switch disengaged customers out of poor standard rate tariffs; with this one on Centrica’s major announcement on restructure which came through late last week.

Centrica has decided to cut 6,000 jobs and focus away from continued expansion of their upstream E&P (exploration and production) business. It is already actively divesting some of its upstream investments. It is set to exit offshore and onshore wind farm joint ventures as soon as a suitable buyer can be found. The same goes for its holding in UK nuclear power.

Although, if you read the latest interview in Utility Week from Juliet Davenport, chief executive of Good Energy, British Gas ought to be focusing hard on selling off its carbon-intensive assets before they have to write off these investment off altogether!

That said, this work has begun with the imminent closure of up to three CCGT power stations (Killinghome, Humber and Briggs) and selling off of others. So this work is already well underway with sales of Centrica Energy assets on both sides of the pond. These sales are supposed to be generating £1bn in the next couple of years.

It is reinvesting all of these funds and more in other downstream areas of the business - focusing about £1.5bn to transition the business away from the old centralised energy model over the next five years. In the future, it will maintain a smaller E&P business of 40-50mmboe down from 75mmboe today. Centrica has effectively capped annual E&P investment at £600m that’s on the back of c£9 billion upstream investment over the last eight years.

By contrast, it is definitely seeking to focus on the retail side of its business. It will be investing £500m in operating costs and capital expenditure in building capacity (new customers – many of whom will be in the US as a reward for Direct Energy’s strong financial performance over the last year or so). It will also be building up its capability in the Connected Homes space.

It will be investing a further £700m in B2B Services capability including energy efficiency, flexible generation and new technologies alongside existing energy management systems. £250m is being spent on improving its overall services. To this end three redundancy exclusion zones have been established: safety, compliance and customer service.

As well as reflecting a widely-anticipated trend to decentralise power generation, bringing it closer to its point of use; it also reflects where the money is coming from today at Centrica as the price of oil and gas continues on its downward trend. British Gas posted operating profit of £526m in the first half of this year, up from £455 million in the first half of 2014; while Centrica Energy went the other way – seeing profits fall dramatically from £526m in its first half year financial results to just £116m.

The new focus on the retail consumer and consumer technologies (including no doubt domestic energy storage battery technology and energy efficiency services linked to smart metering) appears to be near universal now with France’s GDF Suez, Germany’s RWE and Eon also focusing away from increasing fossil fuel-burning generation capacity and towards energy saving enablement with the hard-pressed retail consumer more in their mind’s eye.


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