#10 Centrica CEO, Chris O'Shea: The Impact of North Sea Demise is Understated

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0:17Hello and welcome to Big Boss interview from the BBC. I'm Fliss Hanna and I'm here with Sean Farrington who's got details of the latest interview. Very big boss from Centrica. Yes, very big. Centrica, one of our biggest businesses and they are the owners of British Gas as well. So they're in the energy business, but also they are supplying that energy to millions, more than 10 million households around the country. So Chris O'Shea is the chief executive there. Always an interesting person to speak to. Whoever's in that chief executive role, Chris O'Shea, interesting when you are balancing the returning billions of pounds to shareholders, as they have done in recent years, those that are invested in the business versus the energy price that you are charging your customers.

1:03And we know that in recent years, households have found it quite the squeeze. So we talked about that and how he navigates that as a boss, but also why they're making the decisions they do around those finances. And we got into quite a bit else as well. The future of the North Sea, he was pretty interesting on, particularly some of his concerns around Aberdeen amidst his positivity for the energy industry. He had some thoughts on that. They've gone through a lot of Centrica lately. He's had to lay off thousands of staff. So it was quite a wide-ranging conversation we had, never mind the fact they've had to pick up thousands of customers who were at Tomato Energy that went bust recently as well.

1:40So some interesting thoughts there where we will actually hear more as you listen on from the regulator and from some of British Gas's rivals about what is really going on in the energy industry at the moment. It's interesting, isn't it? because we always say what these big bosses are thinking does have a direct impact on all of us. But Centrica, British Gas, has a real direct impact on how much people actually have left in their banks at the end of the month. Yeah, this person's decisions has a huge knock-on effect. And actually, Chris O'Shea is a bit more recognisable than most. He likes speaking.

2:13He likes doing interviews. He's popped up on the sofa on the TV. You'll see him on the TV channels as that chief executive with the moustache and the beard. And people might then go, as literally happened to me after I did this interview when people say, oh, who are you talking to today? And I described who it was. And then when I described what it looked like, they were like, oh, him. The guy with the moustache. Yeah. And we actually got onto that a little bit about, you know, as a boss and in this kind of industry where so many households want to know what it is you're saying, how do you go about that?

2:42Are these conscious decisions you're making? So there was that and plenty more that we got into. Okay, well, let's hear it. This is Sean Farrington chatting to Chris O'Shea from Centrica.

2:54For a world in which you work and in which Centrica is on British Gas is, there's never sort of a shortage of news, is there? And just in recent days, we've seen that British Gas has had to take on 23 ,000 customers from Tomato Energy. Can you just explain to us, whether you're a Tomato Energy customer or another customer out there, hearing of companies going under that are supplying them their energy, what's this been all about? We don't know the full details of what's going on, but essentially, when you retail energy, you need to make sure that you've got enough capital. It's a bit of a risky business.

3:30You take price risk on there and you take volume risk, but you've got to make sure, essentially, that you've got enough money in the business so that if you get into trouble, you've got enough money to tide you over. And that was what the financial resilience rules that Ofgem brought in were supposed to do, but they're not implementing them properly. and what that means is that companies like Tomato and other companies are rumoured to be in trouble as well. They get into trouble, they don't have enough money and they go out of business and the cost of going out of business lands on the consumer and so this is a repeat I fear of what we saw in 2021-2022 when half the market went out of business.

4:05We've seen two so far this year, Rebel Energy earlier this year than Tomato and it's quite distressing for customers. The staff lose their jobs, it's distressing for them but it's all down to poor regulation. We need a regulator who is looking to drive growth, drive investment. And for that, there needs to be an investable market. And sadly, at the moment, we're not seeing that. Don't we need this competition, though? Isn't the balance there that the regulator sets these rules, they encourage new players into the market, and the nature of entrepreneurship and innovation and attempting to break new ground, is that some businesses will fall by the wayside along the way?

4:42Yeah, absolutely. The competition that's come into this market has been great. We've learned a lot from it, actually. Not everybody's been great. Some people have come in, they haven't really had any new ideas, and they have gone bust and cost consumers a fortune. But competition's brilliant. But you've got to recognise that, I mean, if somebody had a great idea for a bank, you wouldn't say, like, let them set up a bank if they don't have enough capital. In energy companies, we take customer deposits, we hold customer cash. And so having a great idea is one thing, but making sure that you've got enough money.

5:10So ultimately, what happens just now with energy companies like this is that if it all goes well, the owners make a lot of money and usually are private owners. And if it doesn't go well, the consumer picks up the tab. You cannot have a system whereby the profits are privatised and the losses are socialised. And that's what we've got at the moment. That's what we had in 21-22. That's why the capital adequacy is so important. So competition, absolutely, we have to have that. But you have to have a system where the shareholders bear the losses. The regulator Ofgem does say, if we looked at the amount of assets that the sector was holding at the height of the crisis, there would have been, you know, they say£1.7 billion in deficit, but now the sector holds around£7.5 billion in assets.

5:52They reckon that any claims that they've relaxed financial controls are inaccurate. Yeah, that's just not true. I mean, the regulator is not being transparent. There are three companies that failed to meet the financial resilience test and the regulator would not disclose who they were. And they still won't disclose who they are. And so it's all very well seen. Collectively, there's£7.5 billion worth of assets. But what if one company has£7.4 and everyone else has£100 million? So if the regulator claims that they haven't relaxed the financial test, just give us the information. Tell us who failed.

6:26Tell us by how much. Tell us how long it's going to take for them to recover. Just show us. If there's not a problem, then it would be great to know. I don't know why they don't trust customers to have the information. But they should be far more transparent in my view. That's all we ask for. We ask for transparency and fairness. In the process of the rules and regulations that Ofgem have set up, we have seen a massive competitor to British gas materialise in octopus. That may not have happened if the regulator hadn't had the approach it has had. Has that not been a very, very good thing to see the technological innovation that that company has brought and then the competitiveness that it's brought to energy supply in the UK?

7:07So if you go back to, I don't know, 2017, 2018, when the price cap was brought in, this stated issue was that there was six big energy suppliers and Ofgem wanted to disrupt that. And they brought in rules that favored smaller energy suppliers. So some of them, up to a certain amount of customers, didn't have to pay certain levies. And we got a proliferation of companies that came in. But what they did was they wanted to have a price cap and they wanted to have extreme competition. and you don't need to be an economics professor to understand that you get price control through either a specific price cap or through extreme competition but if you have both it will end badly and we wrote i wrote to the regulator and met with the regulator in 2020 21 2022 to tell them the energy market was going to collapse and that the natural conclusion of the price cap and the extreme competition that they were pushing and which was in a way they were skewing the playing field so that you had this competition was that you would end up back where you started and i think seven years ago the six largest suppliers supplied 93 percent of the uk gas and electricity and today they supply 94 and really what you've had is you have a two suppliers fall out you've had sse and in power and they've been replaced by oval and octopus so you could argue that today we're exactly where we were seven years ago but consumers have each paid a hundred pounds for the cost of the regulatory failures this has been a real failure if you look at markets across Europe, across the US, this is the only energy market that imploded during the energy crisis.

8:36It's the only place where retailers went absolutely bust. Half the market went bust. You've got to say if it's the only place where you've got the kind of regulation that we've got and the kind of regulator that we've got. So you've got to look and say, what is the cause and what's the effect? And the effect is companies going bust. And I think the cause is poorly implemented regulation. So the biggest failure was bulb. And we saw that impact where that cost the country quite a bit of money. And it's all about risk management. So you've got to make sure that as well as the innovation in the marketing and as well as the innovation in the system, you actually know how to manage the risks.

9:09Because we're talking about billions of pounds worth of consumer money. So we simply think that it's not right that you've got a system whereby the profits are privatised and the losses are socialised. And that's what we've got at the moment. And so I'm all for competition. I think we learn a lot from competition and hopefully competition will learn a lot from us as well. And it makes us better but it's got to be proper competition and it's got to be competition that doesn't result in gambles with customer money and that's what we're seeing at the moment. And I'm really worried that now having had two failures this year and the reports that Ofgem, the regulator, are relaxing the requirements on capital, we're going to have a real problem.

9:46We need proper regulation. What is it that you think should happen to energy regulation in the UK? So I think we've seen the impact in the water sector of a regulator who does not set the environment to encourage growth. And we saw the CurnList report, which called for the breakup of OfWAP. And we saw EUK recently, which is the energy trade body that represents all energy companies, and they called for the breakup of Ofgem. And their basis was that Ofgem was not fit for purpose. Now, it's hard for me to say whether Ofgem is fit for purpose or not, but I would note just a few things. One is in the last five years, they have doubled their budget and they have doubled their headcount.

10:27so we need a regulator that will promote growth but i'm not sure we want growth in employment at the regulator we want growth in employment at energy companies we want to see more people with better well-paid jobs we've also seen new rules implemented when i'm seeing a couple of failures of companies and i've seen the rules not implemented properly and i'm not sure that we're seeing the environment being created for growth by the regulator and so we support very much the Chancellor's call for regulators to promote growth and for that to be a key requirement. I just don't see that coming through Ofgem at the moment.

11:03If there's a better way to do this with a different regulatory setup that will mean that customers get better service, that we have companies that are adequately capitalised so that consumers are not taking the risk as they are today, and that we see the growth that's required in employment and in activity but not in bills, then I would support that. Another aspect of what you're describing in there with the regulation is encouraging growth. And the parallels you sort of drew between the water regulator and the people will be very familiar with the criticisms of the water industry, the water regulator in recent times, given partly the profits made in those sectors, the dividends that are being paid out.

11:44Can you explain why Centrica in recent years has been paying out a billion pounds or more to shareholders effectively, whether it's through dividends, share buybacks, and you have plans to increase dividends in a time where we need more investment in our infrastructure? So I think you have to look and say, what are we investing? So we are in the middle of a£4 billion plus investment programme. So we have recently become the largest strategic investor in Sizewell Sea, the largest nuclear power station to be built in the UK in 40 years. We are investing substantial sums of money in our smart meter programme.

12:22We're investing substantial amounts of money in gas peaking assets, so effectively assets that will come on to provide electricity when the wind doesn't blow and the sun doesn't shine. So we bought the Isle of Grain LNG terminal, which helps the UK energy security. So that's the largest LNG terminal in Europe. I think it's the sixth or eighth largest in the world. So we're putting a huge amount of money in investment. But as you know, investors invest and they want a return. So people don't put the money in the bank and say, it's OK, don't give me any interest. And investors don't buy shares and say, it's OK, don't give me any return.

12:52Now, whether you're a public company where it's a matter of public record, what you do, whether you're a private company, lots of these private companies have got these very odd trademark agreements whereby the energy retail business pays a huge amount of money to parent companies for trademarks and all this kind of stuff. We don't have any of that in Centrica. So we have a very transparent financial policy. We're investing billions of pounds, but we're also giving our shareholders a return. We've got over 500 ,000 shareholders, a lot of whom are your listeners. And they've had quite a tough time.

13:18We cancelled our dividend in 2020, I think, and we didn't reinstate it for a few years because we wanted to make sure that we had enough money in there to underpin the financial resilience of the business. It's exactly what we call on Offgem to do with these other companies. Given we've heard over the years your personal views on a variety of aspects of the energy market, whether it's sort of saying it can't justify your own salary or talking about social tariffs, You have your own perspective on how energy supply should work to the country. Is it working, this scenario where there are profits at that level being made and you are feeling like you have to return money to those shareholders instead of putting those profits into infrastructure?

14:06No, look, I think Centric is a diversified company. So the vast majority of our profits are not made from energy retail. and so energy retail is one part of our business but we produce gas we produce electricity we store gas we store electricity we optimize we manage assets on behalf of third parties and the vast majority of our dividends and the like are paid out of those profits there is very little profit that's made in the energy retail business and so i think that the question i mean if you were to look and see so there's one big energy company that is reputed to be in very dire financial circumstances at the moment and is reputed to be trying to raise capital and trying to raise capital for a long time, but apparently they can't.

14:45If this was an industry which had excessive profits, people would be dying to pour capital into it. They would be inundated with offers of capital. And so the energy retail business, the one that people talk about, the one I suspect that you're talking about, you're capped on the profit that you can make at 2.4 % of your revenue. Most other markets in Europe, the profit's between 4 % and 8%. The other markets, they didn't collapse. And so I think what you find at the moment is that there is not excessive profits being made in energy retail. but diversified companies might have other sources of profits.

15:14So if that is the case, do you find it hard as a boss of SentryCare where you're trying to explain now that the profits aren't made from supplying energy to households? Do you find it hard to juggle the two? Is it a more complicated message to try and get to customers when you are a big energy investor, as you are, in infrastructure, as well as supplying energy to 10, 11 million households around the UK? No, I don't find it hard. I'm unbelievably lucky. I've got a great job and I enjoy it. I'm very fortunate to have it. So it's not hard. It is a complicated story. Do you think you're successful in telling it?

16:01It's probably not for me to say. I think that it depends on the audience and it depends on what's in the news at the time. And I think it depends on how people report what you say. I think there's always room for improvement. So I wouldn't say that it was job done. You're always going to have to explain. But I think that the reason for doing things that's coming to talk to you in this program is because I think we should have transparency. And it's all we're calling for from regulators and some of the competitors that claim to be pro-competition but may well be anti-competition because they don't want people to know what's going on.

16:33I'm always happy to put myself out there and to take the questions and to try and explain to people what's going on because I think that when people understand what's going on, then they have more information, they can make a better judgment. Do you think people might think this energy system isn't working for them where we've come out of the energy price crisis and we're constantly told your energy bills aren't going to go back to where they were, There might not be the sky-high prices that we saw at the very heights, but they're not going to go back to where they were. It's going to be a long time coming before people start to see an easing in their energy bills.

17:11And yet at the same time, similar to the story maybe in our water industry, they see that those that are investing in this, making very large profits and returning the money to shareholders. Are you ever going to win that argument with households? I think it depends what argument you're running there. I mean, I think, you know, you're a business reporter, so you know that any company that is unable to give a return to its shareholders will not be in business for very long. And it's probably the same as the supermarket companies, people that sell food. You know, so the question is, is it OK for them to make a profit and return to their shareholders?

17:51And the reality is you've got to have that. You've got to have an element of profit. Otherwise, nobody will provide you with any capital. But I think what we're forgetting, I think there's a lot of self-serving comments that go on in the discussion about energy. So the energy crisis, which was provoked by the Russian invasion of Ukraine, has basically dissipated. It's gone. But what people don't tell you is that energy prices have doubled in the run-up to the invasion of Ukraine. And so the long-run average energy prices in the UK were not back to there just now. and I'm not sure that we will go back to there.

18:25And the reason that they doubled is because the demand is going up and the supply is not going up, at least in the UK, and therefore energy bills are higher just now. They're actually slightly lower than they were prior to the Russian invasion of Ukraine, but they're higher than they were in the past. Now, lots of people will tell you, for example, we need a lot of wind, we need a lot of solar, we need a lot of nuclear, and we need a lot of gas fire generation. And a lot of people will tell you, that wind power is, there was a great article in the weekend by Dieter Helm in the Times. And a lot of people tell you that wind power is nine, 10 times cheaper than gas fire generation.

19:04And I spoke to the CEO of one of the large energy retailers who makes this statement often. And I said, I'm not sure I understand exactly how that's the case because when you look at the whole system cost, the price we're paying for wind today is the same as the price we're paying for gas fire electricity. And he said, which was quite shocking, I thought he said, I'm always very careful when I say the wholesale price is a lot cheaper. And it can be. But the reality is consumers don't pay the wholesale price. Consumers pay the price on the market plus the thing called the contracts or differences CFD price that these producers are given.

19:34And I thought that was very misleading, very self-serving. So what I'll do is I'll give out the facts to people. Now, that's not always popular. Sometimes I get heavily criticised. But I think it's super important that we're honest with people. And we do need more wind. We do need more solar. and I think the push for clean power is exactly the right push. But what we've got to make sure is that as we do that, we don't end up with an energy system that's unaffordable because if we've got 100 % clean energy system and nobody can afford it, that will be a complete and utter failure. By the same token, if we have an energy system that's spewing out a huge amount of carbon but it's very affordable, that will be a failure.

20:10You've got to get this balance right between cleaning the energy system but making sure that the energy is affordable. Do you think the government has us on a path to that sustainable and affordable energy system right now when you hear how it talks about renewables and green investment and net zero? So, look, I think that there's always room for improvement. I think that the Energy Secretary, Ed Miliband, gets a bad rap, actually. I think that I spend a lot of time dealing with Ed and he cares deeply about the environment and he cares deeply about clean energy and he's not this zealot that people make him into at least I don't find him to be that I find him quite practical, quite pragmatic and the reality is that the energy system that we've got hasn't been built in the last 16 months the energy system we've got has been built in the last 50 years I think that we've got this clean power 2030 push and that is unbelievably ambitious and I'm not 100 % sure that we'll get there.

21:10But I am 100 % sure that we'll get further by having this really, really stretching target and we'll get further by having that. I think that there are areas of current debate where, you know, for example, one of the areas of debate is North Sea licenses where we're not granting you North Sea licenses and the question is, is that the right thing or not? and there are different opinions on that and I think the debate is something that we have to have. I think we have to talk about homegrown energy. What you'll find is that with more wind and more solar, more things that are sold in these contracts or differences, these are fixed prices.

21:50Effectively, you're fixing the price for the consumer. So you don't have the price volatility that you saw with the Russian invasion of Ukraine. That will not come back or it will be far more subdued. But the prices might be a bit higher. What you won't have also is if, for example, gas prices fall over the next three or four years, which we expect them to, if you've got more fixed price power in there, you won't see the benefit that fall. So you see stability. And it's a bit like an insurance policy. How much insurance do you want to buy? Do you want a completely flat price? Or do you want a price that might fall if prices fall and it might rise if prices rise?

22:23And that's a question for policymakers. And we will all have our own opinion on that because we'll all have different risk appetites and different preferences. Do you think there's been too much weight on households in that push for net zero over the years, that people are getting a little bit tired of being told whether it's switching to a smart meter, getting a heat pump, going to an electric car, whatever this drive might be by industry and the government, and actually just people haven't seen the returns quickly enough? So first and foremost, I don't think we should tell people what to do.

22:56I think we should give people all of the information. That's why I call them transparency all the time. Give people all of the information and allow them to make decisions. So I don't think we should tell them you need to do X, Y or Z. And I think the government's recent decision on pushing back a ban on gas boilers is the right thing. Because we shouldn't ban things. We should simply give people facts and let them make their own decisions. Has there been too much of telling people what to do, do you think, then, in these ambitions that many have? I think there have been on occasion some organisations, and I wouldn't actually include government, because government is not really the past government, the current government, they don't really tell people what to do.

23:35They might make their opinions known. But I think there's been quite a lot of people being preached to, and I don't think that's right. So we view the energy transition as something to do with our customers rather than something to do to our customers. So how does that play out when you see people now? having to make decisions over, let's take the electric car for example because we may well hear more about that of the budget. Increased taxes on driving an electric car could well be on their way. Are these the right things to be doing now? Do you know what is tricky? I think that what you mentioned earlier on, you asked if this is complicated.

24:14It is quite complicated. If you look at electric vehicles for example, you've got no tailpipe emissions So you don't have pollution in towns and cities. And, you know, you're in Salford, I think, just now I'm in London. You know, if we can take the pollution out of these cities, that's great. But you've got to have the right public charging infrastructure because lots of people in big cities don't have driveways. But you've also got to look at the overall cost of these things. You've got to look at the environmental impact. So a lithium mine is quite an unpleasant place. I don't know if you've ever been to one.