LONDON: Prime Minister Theresa May’s proposal to cap household energy prices if she is re-elected in June could mean a 600 million pound 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. 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 85 percent 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 2 percent on UK retail margins.
The cap could cut Centrica and SSE’s EBIT (core) margins for their retail divisions to 3 percent from 5 percent. “This is a squeeze in earnings for the big six combined of about 600 million pounds per annum, with Centrica being hit by about 200 million pounds/pa and SSE by about 100 million pounds,” 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 200-400 million pounds a year off its 1.6 billion pounds per year energy supply operating costs.
The price cap could also prompt customers to switch energy suppliers, accelerating customer losses and resulting in job losses for the retail industry of 5,000-10,000, the bank added. The cap could also force Innogy to sell off its UK retail customers, close its business down altogether or merge with another player to bring down costs. “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. German rival E.ON has also warned of tougher conditions in the British retail market. Although E.ON stands a better chance of adapting to a price cap than Innogy, its exit from UK retail might not be completely out of the question, Deutsche Bank said.
For EDF and Iberdrola, UK retail forms a smaller part of group earnings and equity value. EDF is unlikely to consider exiting the UK retail market due to its large nuclear, fossil fuel and renewable generation business but a price cap will still cut its UK retail market margins significantly. “For Iberdrola, we estimate an effect on group earnings of perhaps 1-2 percent which the company may be able to offset with cost cutting across the group,” Deutsche Bank said.