Utilities rally as in-line Ofgem price cap provides clarity
By Michele Maatouk
Date: Thursday 06 Sep 2018
(Sharecast News) - London-listed utilities rallied on Thursday as investors breathed a sigh of relief after Ofgem's proposed price cap came in in line with expectations, ending uncertainty for the sector.
The energy regulator said energy suppliers will not be allowed to charge a typical dual-fuel customer paying by direct debit more than £1,136 a year under the new price cap. Analysts had pencilled in a range of between £1,100 and £1,160.
Russ Mould, investment director at AJ Bell, said the findings of the report were "no worse than expected".
"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. This should help reinforce the credibility of earnings and most importantly dividend forecasts," said Mould.
"Ofgem has therefore shown its teeth but perhaps not bitten quite as hard as it could have. Its report now means that the utilities - and investors - know exactly where they stand and, as the biggest two suppliers in the retail UK electricity market, Centrica and SSE may be particularly relieved."
At 1030 BST, British Gas owner Centrica was up 4.9% to 150.35p, while United Utilities was 1.8% higher at 725.60p, Severn Trent was up 1.7% to 1,955.50p and SSE was up 1.6% to 1,284.50p.
Meanwhile, RBC Capital Markets analyst John Musk said the news acts as a line in the sand and starts to give clarity on future margins, removing some of the downside risk to market expectations.
Musk said Centrica and SEE look to be relatively well positioned versus the peer group in that they currently have the lowest average tariffs and thus will see a current impact of around £60-70 per standard variable tariff customer, before any potential cost offsets.
He said the most expensive of the 'Big Six' are Scottish Power and EDF, which will see the biggest impact on SVT bills.
"We note that the cap may be marginally adjusted by the time it is introduced at year end (for items such as inflation) but the wholesale cost element won't be adjusted at this stage (and was based on cost assessments as at July). The next iteration of the cap will be announced in February 2019 (effective 1st April) and based on recent movements in wholesale prices this is likely to be increased, in our view.
"As such, we stand by our estimate that the ultimate impact on Centrica is unlikely to be greater than £150m at the EBIT level (around 3m SVT customers at £50/customer) in 2019. Overall, we see the in-line headline number on the price cap as a relief for Centrica."
Ofgem said in a statement earlier that the cap would see 11 million households on poor value default deals save around £75 a year on average, while a typical consumer on the most expensive tariff would save more than £120.
Ofgem chief executive Dermot Nolan said: "Once the price cap is in place, all households in Great Britain covered by the cap will be protected from being overcharged for their energy. Consumers can have confidence that falls in energy costs will be passed on to them and if costs increase, Ofgem will ensure that any rise will be due to genuine increases in energy costs rather than supplier profiteering.
"Households protected by the cap will be able to save even more money by shopping around for a better deal. Meanwhile Ofgem will continue with reforms which aim to deliver a more competitive retail energy market which, combined with protection for those who need it, works for all consumers."
The price cap is due to kick in at the end of the year and remain in place until 2023 at the latest.
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