Tuesday 25 July 2017

UK energy sector faces losses ahead of ESB move

Theresa May
Theresa May
Donal O'Donovan

Donal O'Donovan

UK energy providers are being warned about a huge hit to earnings as well as job losses just as the ESB prepares to enter the market there.

British Prime Minister Theresa May has proposed a cap on household energy prices if she is re-elected in June.

It could mean a £600m (€706m) a year hit to the earnings of the country's "Big Six" energy companies and thousands of job cuts, Deutsche Bank said on Monday.

The squeeze on margins could also potentially push Innogy, which owns Npower, to exit the UK retail market altogether, the bank said.

The move would also have implications for the ESB, which is planning to enter the UK residential electricity market this summer, and is also advancing a project to build a €1bn gas-fired power plant in Yorkshire that will be among the biggest in Britain. The ESB already owns energy-distribution assets in the North.

May has pledged to cap standard variable tariffs if the Conservative Party wins the election on June 8 due to a doubling of energy bills in Britain over the past decade.

The British market is dominated by six big providers - Centrica, SSE, Scottish Power, Innogy-owned Npower, E.ON and EDF Energy - which account for about 85pc of the retail electricity market.

The industry has argued that a price cap would wipe out competition and damage investment.

Deutsche Bank analysts expect April 2018 to be the likely start date for the price cap and expect all of six companies to experience a squeeze of around 2pc on UK retail margins.

Deutsche Bank's cap could cut Bord Gáis Energy owner Centrica and SSE's margins for their retail divisions to 3pc from 5pc.

"This is a squeeze in earnings for the big six combined of about £600m per annum, with Centrica being hit by about £200m a year and SSE by about £100m," they said in a research note.

Big cost cuts will be needed to limit the impact on earnings, the bank said. For example, Centrica might need to cut an additional £200m to £400m a year off its £1.6bn-a-year operating costs.

The price cap could result in job losses of 5,000-10,000, the bank added.

The cap could also force Innogy to sell off its UK retail customers.

"We believe a price cap might prompt a UK retail exit for Innogy while E.ON may struggle to secure any value from its business," Deutsche Bank said.

Last week, Innogy said it had lost another 200,000 customers in Britain and warned of further cost cuts at its Npower business, which is no longer expected to make a profit this year because of growing competition. (Additional reporting Reuters)

Irish Independent

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