Energy companies Centrica plc (LON:CNA) and SSE (LON:SSE) were top fallers on the FTSE 100 in morning trade after Theresa May vowed to cap “unfair” energy bills.
In a column for The Sun newspaper, the Prime Minister confirmed her pledge to crack down on the six biggest energy suppliers if her Conservatives win the general election on 8 June.
Watchdog Ofgem will set a maximum amount that energy firms can charge for units of electricity and gas every six months, she explained.
May said the plan would save about 17 million families on poor standard variable tariffs as much as £100 a year.
“It is clear to me that the energy market is not working for ordinary working families.Too many people simply aren’t getting a fair deal,” she wrote.
“So I am making this promise: if I am re-elected on 8 June, I will take action to end this injustice by introducing a cap on unfair energy price rises.”
I will stand up for millions of working families repeatedly hit with rising gas and electricity bills: https://t.co/lI8lyPMfSs
— Theresa May (@theresa_may) 9 May 2017
Price cap a massive hit to the energy sector, says ETX Capital...
Centrica’s shares fell 3.01% to 196.30p and SSE declined 0.83% to 1,436.74 in morning trade on the back of the column.
Neil Wilson, senior market analyst at ETX Capital, said the move to cap energy bills would be a “massive hit” to the industry.
“It might cost Centrica something like £200mln and make it much tougher for the firm to reintroduce its progressive dividend policy,” he said.
“Like other providers it relies heavily on these standard variable rate tariffs – about three-quarters of customers are on these lucrative contracts.”
Centrica lobbies governement on proposal...
Centrica said yesterday it was lobbying the government to find an alternative to the proposed price cap. The company warned that the move would lead to reduced competition and choice as well as potentially higher average prices.
“We have had a regular and constructive dialogue with the government and have proposed alternative ways to improve the market further and address their concerns, without resorting to price regulation,” the group said in a trading update.
Centrica lost 261,000 customers in the first quarter of 2017 even though it was only one of the big six energy suppliers to not raise its tariffs over winter. Last year it also lost 400,000 customers, reducing its UK residential clients to below 14mln for the first time.
Goldman Sachs said in a note yesterday that if the energy price cap extended to standard variable tariffs, it would impact Centrica the most, prompting a 23-56% downgrade to consensus forecasts for earnings per share in 2019.
“If the current cap mechanism was extended to include SVTs, we estimate that 75% of the Big Six suppliers’ customer base would be subject to a cap.
“Our scenario analysis suggests a potential reduction in UK Energy Supply EBITDA (underlying earnings) of 40%-50%.”
Profit margins of Big Six energy suppliers at record high last year...
Energy prices have risen by more than 150% of the past 15 years.
Last year profit margins of the biggest energy suppliers - British Gas, EDF Energy, Eon, Npower and Scottish Power – reached a record high as they failed to pass on savings of a decline in wholesale costs, according to Lazarus Research yesterday.
Combined profits of the suppliers rose by 7.8%, or nearly £1.1bn, in 2016.
“With a cap it would be very hard for the Big Six to generate the kind of profits they have been able to,” Wilson said.
“With the Conservatives almost certain to win a majority, it’s highly likely the pledge will be carried out. It does seem that a wave of 10% price hikes this spring was bad timing for companies who maybe thought they had a few more years until a General Election and who didn’t bank on the Conservatives going down this route.”
Energy bill cap may benefit some...
However, Wilson added that Centrica may benefit from a price cap given that it is losing customers to smaller providers.
The analyst explained there are now dozens of small energy providers competing with the big Six that might not survive a price cap, reduction competition and relieving pressure on the likes of Centrica and SSE.