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SSE warns on profits after surprise EU court ruling on UK capacity market

Under the UK capacity market scheme, the government pays power firms extra money to ensure a reliable supply of electricity during times of peak demand but it was suspended in November after the EU ruled it is an illegal form of state aid
uk power towers
SSE was due to receive another £60mln this year, but it now expects it won’t see this for at least the time being

SSE PLC (LON:SSE) has warned that a surprise European Union court ruling which deemed the UK capacity market to be illegal will dent this year’s profits by up to a further 15%.

Back in its November half-year trading update, the energy supplier said it expected earnings per share to be between 70-75p, which was already substantially below the 121.1p it achieved in 2018.

READ: SSE shares could slump if UK general election is called

But the EU’s judgement, which came a day after those interim results, means EPS will now likely drop even further, to between 64-69p.

The UK capacity market is the main government policy for ‘keeping the lights on’. It pays energy companies extra money to make sure there is enough reliable electricity supply during times of high demand or low wind.

So far it has paid out almost £6bn in contracts but the EU, which approved the scheme back in 2014, has now reversed its decision, putting the capacity market on hold for the time being.

Dividend maintained

That means no payments will be made to power firms until the issue is resolved. SSE had expected to receive a further £60mln this year, but it now expects that it won’t receive this during the current financial year (to the end of March).

“The UK government … stated in February 2019 that it intends to 'ensure that suspended payments are made to holders of capacity market agreements for 2018/19.' This should make this income recognition issue a matter of timing only.”

Despite the minor profit warning, SSE said it still intends to pay out a full-year dividend 97.5p, while it also reaffirmed its commitment to its five-year dividend plan set out last year.

Still looking to sell retail power unit

Elsewhere in the update, the FTSE 100 group confirmed it is still looking to offload its energy services business, which it has previously said would be “best positioned” outside of the company.

A merger between the unit and Npower, which would have created the UK’s second-largest retail power provider, was called off in December.

The deal always looked complicated to analysts and despite winning approval from the Competition and Markets Authority, SSE backed away, claiming it was no longer in the best interests of customers, employees or shareholders.

Muted share reaction

Shares fell 2% in early deals on Friday but, despite the warning, they have since recovered and are only 0.2% lower at 1,170.8p, shortly after midday in London.

The lack of share price reaction has confused analysts, although Helal Miah, an investment research analyst at The Share Centre, thinks he knows why the market hasn’t reacted too strongly.

“This news should have been taken badly by investors, but the shares only fell by 2% at the market open, but the news of that management are now considering a demerger or a separate listing of its energy services business following the failed merger with Npower has disrupted negative sentiment,” he said in a note to clients.

“This along with disposals of other assets has the potential to realise over £1bn, which is deemed good value for investors.

“The group also provided reassurances over its dividend which is to be maintained at 97.5p for the full year giving it an excellent yield.”

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