2004 ‘Independent’ Article About Dr Paul Golby, E.ON CEO

Paul Golby: Lights out – ‘We should not kid ourselves it will always be all right on the night’

The chief executive of Powergen is not a prophet of doom, he tells Tim Webb, but the need for new power stations is pressing

Sunday, 6 June 2004

Paul Golby has earned himself a reputation as a Cassandra. When the chief executive of Powergen, the UK’s second-largest energy group, appeared on Radio 4’s Today programme last month, the presenter tried to get him to say the “lights will go out” four times. Golby did not take the bait. But you can’t blame the presenter for trying. In October 2002, Golby caused a storm when he declared that depressed electricity prices meant the market was “bust”. Days later, TXU Europe, the supplier and generator, went into administration (and was bought by Powergen), followed in rapid succession by other power-station owners.

Almost two years on, Golby has no regrets, but derives little satisfaction from getting it right: “The comments were correct. But I would not say that ‘vindicated’ is the right word.”

Today, the UK faces even more pressing energy concerns. The electricity grid is crumbling, as demonstrated by last summer’s power cuts in the capital. Stations built in the 1950s and 1960s, and designed to last 40 years, “are coming to the end of their useful lives”, Golby says. Replacing the grid and ageing fossil-fuel power stations will cost up to £70bn over the next decade, by his reckoning. Electricity prices will have to rise by a fifth as a result, and that’s before accounting for the cost of the Government’s subsidies of renewable energy. “You have got to have a balance between the environment, security of supply, and affordability,” he says. Golby has a good record on calling the energy market. So when the prophet says something, it is worth listening.

“I do not think we are about to see widespread power cuts,” he says. “But we do need to start making decisions fairly urgently.” The Government’s White Paper on energy two years ago outlined its policy for the next 20 years. Long on vision but short on detail, it may have to be followed by another White Paper after the next election, officials privately concede.

Golby finds the uncertainty frustrating. “We need a clear, longer-term framework. To build a power station ready for 2007 or 2008, I need to make the decision now.” For example, no one knows quite how the European Union carbon emissions trading scheme, to be introduced on 1 January, will work. Generators such as Powergen are the largest emitters of carbon dioxide in the UK, and so will be most affected by the scheme.

Other EU directives are also being drawn up to impose new emissions limits on power stations, which could be in place by 2008. Some older fossil-fuel stations – including some owned by Powergen – will be forced to close as a result.

The effect of the uncertainty and rising costs will be reduced investment in the energy sector, just when it needs it most, he says.

The UK will need more power stations. Golby predicts that by 2016 47 per cent of UK plants will have to close because they are either too old or will no longer be economic to run, especially high carbon emitters such as the old coal-fired stations.

To the casual observer, the danger of the lights going out seems remote in the short term. The energy regulator, Ofgem, recently predicted that the amount of spare generating capacity going into the winter would represent over 20 per cent of total generation. This is higher than the spare capacity last winter, but Golby says this should not provide too much comfort. “There is the view that because mothballed plant is there, that’s OK,” he says. “But a lot of it is older. It is not in the premier league. We should not kid ourselves that it will always be all right on the night.”

Powergen has almost 10,000mw of generation, around a quarter of which is mothballed. This winter, when demand starts to pick up, Golby will decide whether to bring it back on to the grid. “We are keeping it under review. We may bring it back to make sure we supply [Powergen’s nine million] customers.” But, he points out, there is no guarantee that the group will be able to cover the millions it costs to start up a medium-sized power station to meet peak demand for a few weeks.

Powergen is also one of the largest operators of renewable energy. It plans to build enough wind turbines to produce 1,100mw, or enough electricity for a city the size of Birmingham, by 2010. Like other energy companies, its plans are subject to planning permission. Building turbines offshore is not always easier, he says. One recent scheme to put up 11 turbines in Poole harbour in Dorset was blocked by the local yachting club. “Nimbyism is alive and well.”

It costs around £1bn for every 1,000mw of offshore wind-generating capacity. In 2001, Powergen was bought by the German energy giant E.on, which has a stock market value of almost €40bn (£26.7bn), so it can afford to fund the schemes internally. “It’s one of the benefits of being part of a large energy group,” he says. Smaller companies which have to rely on raising external project finance find it harder as some potential backers are sceptical about the Government’s long-term commitment to green energy.

But Golby does not think that Labour’s green energy policy is a passing fad. “Energy has come up the political agenda. I do not see this government or a future government rowing back on these issues. The environmental agenda is now well established.”

Golby is an old-fashioned chief executive in many ways. “I get a buzz out of doing deals,” he admits, having spent over £2.5bn of E.on’s money in two years. “Anyone who said they did not would be lying. But it’s about building something for the future.” He jokes that 21 October is Powergen’s “acquisition anniversary”, as it is the date when it bought TXU Europe and, a year later, Midlands Electricity. But you can tell he also enjoys his verbal jousts with the Government and the regulator. “Not many industries have as political an edge as ours,” he says.

I suppose that means political swing as well, especially when it comes to spying on us,eh Paul? Idiot.

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Paul Golby has earned himself a reputation as a Cassandra. When the chief executive of Powergen, the UK’s second-largest energy group, appeared on Radio 4’s Today programme last month, the presenter tried to get him to say the “lights will go out” four times. Golby did not take the bait. But you can’t blame the presenter for trying. In October 2002, Golby caused a storm when he declared that depressed electricity prices meant the market was “bust”. Days later, TXU Europe, the supplier and generator, went into administration (and was bought by Powergen), followed in rapid succession by other power-station owners.

Paul Golby has earned himself a reputation as a Cassandra. When the chief executive of Powergen, the UK’s second-largest energy group, appeared on Radio 4’s Today programme last month, the presenter tried to get him to say the “lights will go out” four times. Golby did not take the bait. But you can’t blame the presenter for trying. In October 2002, Golby caused a storm when he declared that depressed electricity prices meant the market was “bust”. Days later, TXU Europe, the supplier and generator, went into administration (and was bought by Powergen), followed in rapid succession by other power-station owners.

Almost two years on, Golby has no regrets, but derives little satisfaction from getting it right: “The comments were correct. But I would not say that ‘vindicated’ is the right word.”

Today, the UK faces even more pressing energy concerns. The electricity grid is crumbling, as demonstrated by last summer’s power cuts in the capital. Stations built in the 1950s and 1960s, and designed to last 40 years, “are coming to the end of their useful lives”, Golby says. Replacing the grid and ageing fossil-fuel power stations will cost up to £70bn over the next decade, by his reckoning. Electricity prices will have to rise by a fifth as a result, and that’s before accounting for the cost of the Government’s subsidies of renewable energy. “You have got to have a balance between the environment, security of supply, and affordability,” he says. Golby has a good record on calling the energy market. So when the prophet says something, it is worth listening.

“I do not think we are about to see widespread power cuts,” he says. “But we do need to start making decisions fairly urgently.” The Government’s White Paper on energy two years ago outlined its policy for the next 20 years. Long on vision but short on detail, it may have to be followed by another White Paper after the next election, officials privately concede.

Golby finds the uncertainty frustrating. “We need a clear, longer-term framework. To build a power station ready for 2007 or 2008, I need to make the decision now.” For example, no one knows quite how the European Union carbon emissions trading scheme, to be introduced on 1 January, will work. Generators such as Powergen are the largest emitters of carbon dioxide in the UK, and so will be most affected by the scheme.

Other EU directives are also being drawn up to impose new emissions limits on power stations, which could be in place by 2008. Some older fossil-fuel stations – including some owned by Powergen – will be forced to close as a result.

The effect of the uncertainty and rising costs will be reduced investment in the energy sector, just when it needs it most, he says.

The UK will need more power stations. Golby predicts that by 2016 47 per cent of UK plants will have to close because they are either too old or will no longer be economic to run, especially high carbon emitters such as the old coal-fired stations.

To the casual observer, the danger of the lights going out seems remote in the short term. The energy regulator, Ofgem, recently predicted that the amount of spare generating capacity going into the winter would represent over 20 per cent of total generation. This is higher than the spare capacity last winter, but Golby says this should not provide too much comfort. “There is the view that because mothballed plant is there, that’s OK,” he says. “But a lot of it is older. It is not in the premier league. We should not kid ourselves that it will always be all right on the night.”

Powergen has almost 10,000mw of generation, around a quarter of which is mothballed. This winter, when demand starts to pick up, Golby will decide whether to bring it back on to the grid. “We are keeping it under review. We may bring it back to make sure we supply [Powergen’s nine million] customers.” But, he points out, there is no guarantee that the group will be able to cover the millions it costs to start up a medium-sized power station to meet peak demand for a few weeks.

Powergen is also one of the largest operators of renewable energy. It plans to build enough wind turbines to produce 1,100mw, or enough electricity for a city the size of Birmingham, by 2010. Like other energy companies, its plans are subject to planning permission. Building turbines offshore is not always easier, he says. One recent scheme to put up 11 turbines in Poole harbour in Dorset was blocked by the local yachting club. “Nimbyism is alive and well.”

It costs around £1bn for every 1,000mw of offshore wind-generating capacity. In 2001, Powergen was bought by the German energy giant E.on, which has a stock market value of almost €40bn (£26.7bn), so it can afford to fund the schemes internally. “It’s one of the benefits of being part of a large energy group,” he says. Smaller companies which have to rely on raising external project finance find it harder as some potential backers are sceptical about the Government’s long-term commitment to green energy.

But Golby does not think that Labour’s green energy policy is a passing fad. “Energy has come up the political agenda. I do not see this government or a future government rowing back on these issues. The environmental agenda is now well established.”

Golby is an old-fashioned chief executive in many ways. “I get a buzz out of doing deals,” he admits, having spent over £2.5bn of E.on’s money in two years. “Anyone who said they did not would be lying. But it’s about building something for the future.” He jokes that 21 October is Powergen’s “acquisition anniversary”, as it is the date when it bought TXU Europe and, a year later, Midlands Electricity. But you can tell he also enjoys his verbal jousts with the Government and the regulator. “Not many industries have as political an edge as ours,” he says.

BIOGRAPHY

Born: 1951.

Education: Phd in mechanical engineering, BSc in mechanical engineering, Aston University.

Career (1972-89): joined industrial group Dunlop as an engineer, later becoming managing director, Dunlop Marine Products.

1989-98: executive director at systems company Clayhithe.

1998-to present: managing director of East Midlands Electricity, then chief executive of Powergen.

Directorships: non-executive director of AEA Technology and Midlands Excellence.

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