Thursday 20 September 2018

Powershift is taking its toll on UK's energy giants

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John Lynch

I often wonder if Rip Van Winkle (the man who slept for 20 years) woke up this morning and cast his refreshed eye over the world energy markets, what would he think? Other, that is, from wanting to go straight back to bed. Two decades ago, especially in the UK, there was, let's call it, 'energy' in the energy markets with players convinced that the recent privatisations would bring increased competition, drive prices down and improve customer service.

A newly awoken Rip, on the other hand, would find a market increasingly dominated by a small number of large companies, two from the UK and four from EU countries. These companies piled on the profits while customers suffered rapid and sustained price increases. Now they are getting their comeuppance, not just from the regulators but from oil companies that have woken up to the fact that the modern transport sector demands electricity to get things moving on the roads.

This week we are putting one of these big UK energy operators SSE (or to give it its full name Scottish and Southern Energy) under the microscope.

SSE is the second largest power group in the UK and involved in generating and supplying electricity and gas and other related services like gas storage, exploration and production. It also has many assets in Ireland including Airtricity. The group employs 20,000 and is valued by the market at £14bn (€15.8bn).

New competition and politicians have been the new bugbear of the leading power providers like SSE. Customers have been deserting in face of cheaper, more digital-aware and greener-energy companies. In the last decade, the number of energy suppliers has risen from 10 to 60 and the 'big six' market share has fallen from almost 100pc to 80pc in both the electricity and gas markets.

SSE itself has lost over 400,000 customers. Late last year the group caused a considerable stir when it announced it would spin off its household business to merge with npower, a big German operator. Combined, they said, they would create a company with 13 million customers, just behind market leader, Centrica. Some observers are of the opinion the merger would cement the case for a price cap, if it were to happen. Interestingly, the energy regulator was of the opinion the merger was not in the "interests of the consumer".

Energy price is a hot issue in the UK. The clamour against continual increasing prices and the rip-off of its tariffs attracted the attention of Ed Milliband, then the British Labour leader, who floated the idea of a price cap.

The recent general election tempted both parties to propose a cap. To meet the Labour proposals, the Conservative party manifesto promised the lowest energy costs in Europe, which would entail a cap. Such action sent shivers through the market leaders, suggesting a major hit to the bottom line.

SSE turnover at £29bn (€33bn) has declined by 10pc over the last three years, but its cost reduction programmes have held up pre-tax profits at £1.5bn. The company increased its dividends, which it has every year since 1999, a trend that is hardly sustainable. The overall pessimism on energy suppliers has coloured investors' perceptions. The group shares trade at £14.07, down from yearly high of £15.50 with a modest price earnings of 11. The shares have value but the threat of a substantial price cap looms over the share price.

Meanwhile, the energy market has been rocked by an imaginative move by the oil giant Shell in acquiring an operator called First Utility, a rival to the 'big six'. The acquisition gives Shell a path to consumers using petrol stations. The deal is one of a number of steps by Shell in response to the rise of electric vehicles. Last year it acquired Europe's largest electric car charging company, New Motion, which will be installed in all its service stations.

These acquisitions position Shell to service the electricity supply chain; from production of natural gas for power generation, to wind and solar projects to the sale of electricity and marketing it through First Utility. Interesting times ahead in the energy market.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned

Irish Independent

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