Theresa May's UK energy price cap will 'squeeze margins' for Centrica, SSE
Price controls unveiled by the Primer Minister could put some energy suppliers under severe strain, says ratings agency.
The planned cap on UK household utility prices, recently unveiled by Prime Minister Theresa May, will add pressure on utility company margins, with Centrica and SSE being among the most exposed, according to Fitch Ratings.
The cap - first mooted on 4 October at the Conservative Party Conference - will cover utilities' standard variable tariffs (SVTs), which apply to more than half the households in the country.
This will be a significant expansion from existing price controls, which cover the 4 million households with prepayment meters, and which are due to be extended by the regulator Ofgem to a further 1 million vulnerable customers from February 2018.
The SVT cap may not be implemented until late 2018 and will last until the end of 2020, with the potential for an extension to 2023.
"Given the number of customer accounts that would be affected, utilities may respond by increasing the cost of their other tariffs. It could also reduce the benefits to consumers of switching to lower-cost suppliers and could slow the pace at which the biggest utilities have been losing customers to smaller rivals," Fitch wrote in a note to its clients.
Competition from smaller suppliers has intensified over the past few years and accelerated after the completion of a Competition and Market Authority review into the sector in 2016, which has led to market share losses and weakened margins among the largest suppliers.
The ratings agency opined that the scale of the impact will depend upon the timing of implementation, and the level of the cap and any effects it has on competition.
It noted that Centrica (rated A-/Stable) and SSE (BBB+/Stable) are the most exposed of the big-six energy companies because they "derive a significantly higher proportion of their earnings from UK customer than their more diversified peers EdF (A-/Stable), E.ON (BBB+/Stable), Iberdrola (BBB+/Stable) and innogy (BBB+/Stable).
Both Centrica and SSE also have a high proportion (about 70%) of customers on SVTs.
Fitch observed that the draft bill would allow Ofgem to modify the tariff cap once it has been set, perhaps allowing for a relationship with wholesale prices like the existing PPM cap mechanism.
"But it will still weaken utilities' ability to adjust pricing on affected tariffs once the cap is in place, increasing their exposure to the risk of rising wholesale costs, or other changing market conditions," it concluded.
