SSE has today released its Annual Report for the year ending 31 March 2013. Here Chief Executive Ian Marchant, Deputy Chief Executive Alistair Phillips-Davies and Finance Director Gregor Alexander answer some of the key questions facing SSE and the energy industry.
You have repeatedly made the point that SSE must earn the right to make a profit. Do you believe it has done so this year?
Alistair: This year has been a case of ‘one step forward; one step back’. The outcome of Ofgem’s investigation into our previous sales practices was obviously a significant setback in persuading customers that we are worthy of their trust.
We have a lot of work to do in the months ahead. However, on a more positive note, we introduced a sector-leading Customer Service Guarantee that is delivering for customers.
More broadly, the performance of the Networks businesses, especially in the late March snow storms on the west of Scotland, should have helped to build trust and respect amongst our network customers and other stakeholders.
The record £10.5m fine imposed on SSE for misleading customers has been described as a “damning indictment of what SSE has done.” How can you square that with the values the company promotes?
Ian: I can’t. But I do believe that good companies can make bad mistakes. The test of whether an organisation can live up to the standards expected of it is in making sure the mistake is put right and never repeated. We are all determined that this will be the case with SSE.
There are reports that some big businesses in the UK are avoiding making a fair contribution to the UK Treasury in terms of tax contributions. What is SSE’s position?
Gregor: SSE disagrees strongly with any company that takes an aggressive stance in interpreting tax legislation, or uses so called ‘tax havens’ as a means of doing so. As a UK based and listed company operating solely in the UK and Ireland, SSE believes it has a responsibility to operate within both the letter and spirit of the law at all times. While the position varies from year to year, according to the 2012 PwC Total Tax Contribution survey, SSE ranked 17th for UK taxes paid, whilst being ranked 30th in the FTSE by market capitalisation.
The energy problem in the UK is often described as a ‘trilemma’, of competing pressures from the challenges of climate change, security of supply and energy affordability. In the face of those competing pressures is it possible for SSE to find a sustainable balance?
Alistair: The key word here is balance and to understand the trade-offs that occur in order to achieve that balance. The UK could provide all of its energy more cheaply for a short time through fossil fuels but there would be a very negative impact on natural resources. We also can’t be sure that fossil fuels will deliver security of supply given our reliance on unpredictable, but increasingly competitive and demanding, global markets. The country could put all its eggs in the renewable basket but it cannot generate energy 24/7. Equally, the UK could pursue the very expensive nuclear option, but even the most ardent nuclear supporter is unlikely to claim that it is capable of providing all of the country’s energy requirements. We – and the country as a whole – have to manage these competing demands at the same time as ensuring the choices for future generations are not compromised.
Customers are worried about energy bills. How worried should they be?
Alistair: I am acutely aware the overall cost of energy to our customers is becoming an increasing burden on their household budgets. Energy affordability is a critical issue and we do everything we can to avoid price increases, and will continue to do so. But the additional costs that are borne by the energy customer – such as the cost of government-sponsored environmental and social schemes – have a material impact on their energy bills. These costs are part of an obligation placed on us by Government and there is nothing we can do to avoid it.
Another issue customers are worried about is security of supply. Do you believe the UK’s current plans for Electricity Market Reform will enable sufficient investment in electricity infrastructure to avoid a security of supply crunch in the future?
Ian: We can’t speak on behalf of other companies that may or may not invest, but given that SSE is the only UK headquartered energy utility with such a strong and broad focus on the UK electricity market, I would suggest that our assessment should be of particular concern to the UK government. There is a real risk that the continuing uncertainty over measures such as the Contract for Difference and the capacity market simply increase a reluctance to invest. An early and appropriate capacity mechanism would make a significantly positive impact on the investment case for new gas-fired generation plant that is critical to securing electricity supply throughout this decade.
Alistair: A good illustration of Ian’s point is the example of nuclear. A six month delay in agreeing strike prices for nuclear will simply mean that new nuclear will come on later than expected and well after 2020. But slow progress towards a capacity mechanism will exacerbate an already precarious security of supply problem in the middle of this decade.
When the attention of the public, politicians and the media is fixed firmly onto the debates surrounding security of supply and the price of energy, how important are the Networks businesses to SSE?
Alistair: Many people see networks as the jewel in SSE’s crown, and it’s easy to see why. Of course they provide the basis under which we can make dependable returns but they also provide an important contribution to the culture of SSE as a whole. Operational excellence and a focus and pride for ‘keeping the lights on’ are embedded within the network businesses and influence all the businesses that make up the SSE Group.
In the past, SSE would be described as an excellent operator of energy assets, not necessarily as a company that was excellent at building energy assets. Is this still the case?
Ian: In my ten years as Chief Executive the company has undergone three phases. Firstly we cut waste and duplication in the years after the original merger forming SSE in 1998. Then there was a phase when acquisitions were plenty and SSE built a reputation for good judgement and timing in acquiring assets and for successfully integrating them in to the business. Finally, from 2008, SSE has undertaken a large capital programme of investment focussing on building new wind farms, new transmission infrastructure and the maintenance and development of existing and new thermal generation plant. The company is becoming increasingly skilled in this area.
Alistair: The scale of SSE’s programme of capital investment makes it one of the biggest across the UK and Ireland but we have learnt to pursue and deliver those investments with the same discipline and rigour for which we had built a reputation for in operations and acquisitions. We must constantly caution against complacency and have established ways to maintain the process of continuous improvement.
With a new Chief Executive, will SSE introduce a new strategy for the future?
Alistair: No. SSE’s existing strategy is the product of its whole management team – of which Gregor and I have been members for over a decade. The Board and the senior management team remain as clear as we have always been – SSE’s strategic purpose is to provide the energy people need in a reliable and sustainable way. And in doing so we will work to meet our core financial objective – which is to deliver real growth in the dividend every year.
Gregor: Alistair and I have worked together since SSE was formed in 1998 and each year since then we have been able to point to the benefits of the company’s strategy being realised in practice. There is no reason to change it, and it would be wrong to do so. Obviously, we’ll continue to anticipate and adapt to changes in the sector and in the wider economy. We’ve always done that and we always will – but always within the framework of our established strategy.
Finally, with Ian stepping down as Chief Executive do you have any comments for the future?
Ian: SSE has always had strength and depth to its management team. I am proud that our long term succession planning has meant that Alistair is the right person to succeed me. SSE is a company that is very sure of what it is here to do and what it stands for. That’s partly because of the SSE SET of core values – safety, service, efficiency, sustainability, excellence and teamwork. They’re very well-established throughout SSE. These values, I believe, will endure beyond any of the individuals that hold the most senior management positions.
Gregor: Alistair and I have thoroughly enjoyed working alongside Ian. The great thing is that through the work he has led, the company is on a strong footing for the future, with a clear strategy and straightforward financial objective, backed up by the core values which go to the heart of everything we do.
Alistair: SSE is a good company and Ian has been an outstanding leader. I am enormously looking forward to taking over the reins, working alongside Gregor. But I am clear about what the change means. This is a change of CEO, or team captain, not a change in the core strategy or the overall make-up of the team. SSE’s core strategic purpose remains firm: to provide the energy people need in a reliable and sustainable way and in doing so we will work to meet our principal financial objective: delivering real term increases in the dividend year after year.