Professor Michael Luger, Director for the Centre for Infrastructure Development, comments on news that Npower is planning to axe 1,400 jobs in a restructuring plan:
Over the past month there has been a public outcry about utility companies’ announced plans to raise tariffs. The Labour Party leader even proposed that we put into place a 20-month price freeze. At the risk of sounding like an apologist for power and water companies, I must say that they are caught between a rock and a hard place. To wit: the negative reaction to Npower’s announcement yesterday that it was cutting staff in the UK in an effort to reduce its costs.
Npower and other electric utilities have been under pressure for some time to protect capacity to avoid the brownouts that accompany utilisation rates as high as we have. The cost of maintaining and adding generating and distribution capacity is very high. And the cost of the fuels bought on world markets is volatile and hard to predict. These realities put upward pressure on the tariffs to customers. Npower, part of the German energy conglomerate RWE, is a public company. It, like other power and water companies, needs to generate profits in order to attract shareholders. When tariffs are pushed up too much, politicians and regulators (Ofgem in this case) start to complain and threaten action.
The other way to protect profits is to seek operating efficiencies to reduce costs. That is that RWE is trying to do by moving some back office operations offshore, and deciding not to build a wind farm off the coast of Devon in deep water where the cost of construction had come in higher than expected.
From the evidence I have seen there is enough competition in the electricity sector to ensure that profits are within a reasonable range. Nonetheless, that is a matter for Ofgem to address. Our first priority must be to keep the market competitive. There is legitimate concern about the quality of Npower’s customer service which is more an operational matter than an issue of price setting behaviour. We can only hope that the threat of consumers switching to other providers will be enough incentive for Npower to act. And perhaps the change in back office venue will improve that.