Net zero in Labour’s electricity pricing overhaul

If only Britain could find a way to harness this endless source of hot air: “Government puts fairness and affordability at the centre of electricity market reform to deliver system that puts working people first”. And all as it “drives to deliver clean power mission, protecting families through Plan for Change”.

It’s the latest from Ed Miliband’s energy department, burbling on about Rema — the “review of electricity market arrangements”. It was kicked off by the Tories in 2022 after Putin’s assault on Ukraine sent prices soaring, forcing the government to spend £44 billion subsidising energy bills.

And, back then, there was a clear priority: the urgent overhaul of a system that typically sees pricey gas-fired power plants set the UK’s wholesale electricity price. It’s the result of the “merit order” formula, where electricity prices are set by the marginal cost of the last generating unit required to meet demand over each half-hour period. Usually, that’s gas, which despite generating only about 30 per cent of UK electricity, sets the wholesale price 98 per cent of the time.

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So, has Miliband fixed that? Don’t be daft. He’s completely ignored it. His fantasyland logic? That Britain’s grid will be almost entirely decarbonised by 2030, with gas required only as 5 per cent back-up for when the wind doesn’t blow or sun shine. And, as such, it will rarely set the electricity price anyway.

Let’s hope that utopia arrives — because instead of grappling with the likelihood it doesn’t, Miliband vanished down a different rabbit hole. He’s spent months looking into the pros and cons of “zonal pricing”, where the transmission system is split into different geographical regions. Consumers and businesses would pay different prices depending on how close they are to local power generation (a wind farm, say), with the likes of grid congestion also taken into account.

It would have created a postcode lottery, while deterring investors unfamiliar with the new rules — just when the government’s 2030 target requires £40 billion a year of investment in green power. The good news? Miliband’s seen off the zonal brigade, sticking to national pricing. The bad? That his Rema now has almost nothing in it.

It’s a missed opportunity politically too. Yes, Miliband had some stuff about transmission charging reforms to “provide stronger incentives for investors to build generation where it is needed”. But consumers and businesses are still on the hook for any spike in the gas price — despite there being a relatively simple fix. It was spelt out in May in a report from consultancy Stonehaven, written by Adam Bell, the former head of energy strategy at the business department.

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He recognised gas “must be gradually wound down to deliver decarbonisation” but “also must be kept available to secure the system during periods of low renewable generation”. But decoupling it from electricity price was essential. His plan? An “out-of-market mechanism to manage a gas strategic reserve”.

This would entail offering gas producers a fixed charge to cover operational costs plus an agreed return under a “regulated asset base” model to keep their plants on standby. Sure, there would be tricky talks over returns. But, with the value of their assets dwindling anyway, there’s a deal to be done.

Miliband could have presented it as a political win for the consumer. Instead, he’s brought us a waffly Rema with close to net zero in it.

Bid’s a shed ringer

Those Warehouse Reit sheds must be looking prettier. It was only in May that Blackstone cut its proposed 113.4p-a-share cash bid to a firm 109p after a row over the Radway Green site near Crewe. Well, look at the US asset manager now: back again at 113.4p, or 115p including July’s 1.6p dividend, valuing the business at £489 million.

In the interim Blackstone found itself outbid by Tritax Big Box, with a cash-and-shares offer made up of 0.4236 shares, 47.2p cash and two 1.6p dividends. That’s now worth 111.1p, so Blackstone is ahead — a point it has driven home by turning its bid into a straight offer, requiring only majority support, while also acquiring a 10.49 per cent stake.

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The bit missing so far? A recommendation from the Warehouse board, chaired by Neil Kirton, which the tracker funds typically take as their cue. It could look a simple choice too. Yet, even if Big Box doesn’t top up its bid, there’s not a shedload of difference in the price. Blackstone is providing a cash out at what’s still a big discount to Warehouse’s net asset value of 128p a share. Big Box is offering investors something else: a bit of cash now plus 6.8 per cent of a larger quoted group with complementary assets.

No one needs to make a decision yet, with Warehouse shares closing up 3 per cent at an above-bid 115.4p. This boxing match could still have another round.

Stamped out

Saturdays will never be the same again. How will anyone survive without the reassuring thud of some nice junk mail, conveyed by the posties? Ofcom has decided to let the Royal Mail deliver second-class letters on every other weekday, skipping Saturdays altogether. As the regulator’s networks chief Natalie Black put it: “Urgent reform of the postal service is necessary to give it the best chance of survival”.

So, quick question: if it’s that urgent, why did Ofcom dither for years, leaving Royal Mail’s parent company, International Distribution Services, prey to a £3.6 billion bid from the Czech billionaire Daniel Kretinsky. The regulator reckons the rule change will see cost savings “of between £250 million and £425 million” a year. Capitalise that on a lowly five times earnings and that’s a transfer of up to £2.1 billion to Kretinsky. Only Ofcom would wait until a Czech was in the post.