Shares in British Gas owner Centrica PLC (LON:CNA) and SSE PLC (LON:SSE) gained on Thursday after UK regulator Ofgem proposed an energy bill price cap of £1,136 per year.
The price cap, which Ofgem said would save 11 million households on default deals about £75 on average, removes uncertainty that has weighed on the energy market.
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“There’s nothing the market hates more than a lack of clarity and now the level of the price cap is known analysts can reflect it in their earnings estimates,” said Russ Mould, investment director at AJ Bell.
“This should help reinforce the credibility of earnings and most importantly dividend forecasts.”
The planned cap will be confirmed in November and come into effect at the end of the year. It will remain in place until 2023.
Government clampdown
Ahead of the announcement, the government had promised to crack down on the industry with Prime Minister Theresa May vowing to fix the “broken energy market” to offer fairer prices for consumers who are paying too much.
Draft legislation was drawn up last October and introduced to parliament in February but it did not spell out what price the average energy bill would be capped, creating uncertainty for the sector.
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The Domestic Gas and Electricity Act became law in July, compelling Ofgem to enforce energy suppliers to comply to a cap on tariffs.
Estimated household savings
Ofgem said a typical consumer on the most expensive tariff would save more than £120 but the exact savings each individual household will make will depend on their usage and supplier.
The watchdog's definition is that a typical customer uses 3,100 kilowatts of electricity and 12,000 kilowatts of gas in a year.
In total, the price cap is expected to save consumers around £1bn.
Dermot Nolan, the chief executive of Ofgem, said the price cap will allow the regulator to put in place further reforms to make the energy market “more competitive and work better for all consumers, including making switching energy supplier easier, quicker and more reliable”.
In mid-morning trading, Centrica’s shares rose 4% to 149p SSE shares edged up 1.2% to 1,280p.