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UK energy companies left in dark over price cap plan

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10/05/2017 | 01:10pm CET
Britain's Prime Minister Theresa May holds up a cough sweet after suffering a coughing fit whilst  addressing the Conservative Party conference in Manchester

A British government plan to cap prices has wiped hundreds of millions of pounds off the value of household energy suppliers but details are scant and doubts remain about its implementation.

Prime Minister Theresa May said on Wednesday that a cap would be imposed on standard variable tariffs (SVT), the basic rates that suppliers charge if a customer does not opt for a specific payment plan for gas and electricity.

Under the proposals, energy market regulator Ofgem would be responsible for setting the new cap which would be a temporary measure kept under review.

In July, Ofgem had said it would consider a safeguard tariff for vulnerable customers but stopped short of committing to a wider price cap.

May's announcement sent shares in the biggest energy supplier Centrica (>> Centrica), the owner of British Gas, to a near 14-year low and shares in SSE (>> Scottish and Southern Energy), the second biggest, fell by 3 percent.

Shares have since recovered slightly and Wednesday's reaction was seen as a knee-jerk response to the confirmation of intervention in the energy market.

There are still doubts about whether the plan will be implemented following calls from Centrica as well as rivals Scottish Power and E.ON for SVTs to be scrapped. Questions about May's political tenure further cloud the picture.

Centrica boss Iain Conn said the industry should be forced to work harder to win new customers through competition.

"We do agree the market needs further structural changes," he told BBC Radio.

"We just don't support price caps. There is clear evidence that they don't work, in New Zealand, in Spain, in California, in Ontario. They tend to limit choice, reduce competition and prices tend to bunch around the cap."


Energy bills have doubled in Britain over the past decade to an average of about 1,200 pounds ($1,500) a year, putting the biggest providers in the sights of politicians.

The market is dominated by the so-called big six providers -- Centrica's British Gas, SSE, Iberdrola's (>> Iberdrola) Scottish Power, Innogy's npower (>> Innogy SE), E.ON (>> E.ON) and EDF Energy (>> Electricité de France).

Due to the lack of substance, it is difficult to predict the ultimate impact on energy companies' bottom line. The full impact of a price cap will depend on the depth of the price cuts and how long they remain in place.

"We don't know how it would be introduced, what market it will cover or what the legislation will look like," said Ahmed Farman, equity analyst at investment bank Jefferies.

"If a price cap were introduced along the lines of the pre-payment price caps and covered the whole of the SVT market, it would have a significant impact on SSE and Centrica," he added.

Energy market regulator Ofgem is already in consultation on a measure which would impose a price cap on prepayment meters for the most vulnerable households, which could form the basis for a wider cap, analysts say.

"(For Centrica), the operating profit impact could be as much as 110 million pounds – some 7 percent of operating profit – but legislation will take time to be enacted and Centrica management has said that it will take mitigating action to offset reduced revenues," HSBC analysts said.

A price cap of 1,100 pounds a year would still allow efficient firms to make a margin but a 1,000 pound per year cap would "push the industry into a loss of 700 pounds million," said analysts at Bernstein.

(Reporting by Nina Chestney; Editing by Keith Weir)

By Nina Chestney

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Financials ( GBP)
Sales 2017 27 506 M
EBIT 2017 1 347 M
Net income 2017 599 M
Debt 2017 2 951 M
Yield 2017 8,51%
P/E ratio 2017 12,80
P/E ratio 2018 9,96
EV / Sales 2017 0,40x
EV / Sales 2018 0,38x
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Duration : Period :
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Spread / Average Target 15%
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