U.K. Signals Plan to Tighten Energy Price Rules in Retail Marketby
Utility shares drop on risk of government intervention
CMA proposals may not go far enough for new government
The U.K. will announce changes to its retail energy markets after Prime Minister Theresa May and Secretary of State for Energy Greg Clark last week signaled dissatisfaction with the current structure of consumer tariffs.
“Energy markets must work for all consumers and the government is committed to making that happen,” the Department for Business, Energy & Industrial Strategy said in a statement on Monday. The government will make an announcement on this, a spokesperson said, declining to give any details on the timing.
Shares in Centrica Plc, the biggest energy supplier to Britain’s homes, had their biggest weekly drop since May last week. SSE Plc slid the most for a seven-day period since July 29. Analysts from Jefferies Group LLC to UBS Group AG are predicting that the prospective changes to retail markets could put further pressure on utility stock prices.
Following a two-year investigation into the U.K.’s energy market, Britain’s Competition and Markets Authority will introduce price caps on contracts for 4 million households that use pre-payment meters. The measures were watered down from the original 2015 proposals that would have affected more households. The limits may not go far enough for the new government.
“It’s just not right that two-thirds of energy customers are stuck on the most expensive tariff,” Theresa May said Oct. 5 at the Conservative party conference.
“After the CMA inquiry we closed the door saying there would be no more intervention, but now the door has been reopened,” Lakis Athanasiou, a utilities analyst at Agency Partners LLP, said. “Share prices are going to be in for a rough time for the moment until we know what will happen.”
Centrica shares fell as much as 1.2 percent to 212.70 pence ($2.64) in London to the lowest intraday level since June 29 before trading at 214.70 pence at 1:52 p.m. in London. SSE traded near the lowest in more than three months.
There is “clearly heightened risk” that additional price caps, encompassing a wider group of customers, will be introduced in 2017, Jefferies said in an e-mailed note. In the short-term, the risk of what additional measures could be will “hang over” utility stock prices, according to UBS.
Wholesale power prices are 51 percent higher than last year while natural gas is 6.9 percent more expensive, which may prompt utilities to raise retail rates. More than 1 million people switched electricity supplier in the three months to August, a 27 percent increase compared with last year, according to figures from industry body EnergyUK.
“The political risk for energy has increased,” said Ashley Thomas, an analyst at Societe Generale SA in London. “There has been a consistent message from government that certain elements of U.K. households have been struggling and energy markets not working as they should.”