With the snap general election just one month away, further details on the main political parties’ manifestos continue to appear daily.
While Brexit negotiations have remained high on the political agenda so far, a new policy pursued by prime minister Theresa May has raised the prospect of price caps for energy prices.
May railed against “rip-off” energy prices in a newspaper article and claimed that the energy market was “not working for ordinary working families”.
A price cap had been mooted last month for the ‘Big Six’ – Centrica-owned British Gas, EDF Energy, E.ON UK, Npower, Scottish Power and SSE – but has only been announced as policy today.
Performance of FTSE All Share vs FTSE All Share Electricity YTD
Source: FE Analytics
As shown in the graph above, the utilities-focused FTSE All Share Electricity index is down by 5.84 per cent since the start of the year compared with a 4.93 per cent rise in the main index.
Neil Wilson, senior market analyst at ETX Capital, says energy stocks were down in early trading before clawing back some of the losses.
He said: “The move to cap prices would be a massive hit to the industry. It might cost Centrica something like £200m and make it much tougher for the firm to reintroduce its progressive dividend policy.
“Like other providers it relies heavily on these standard variable rate tariffs – about three-quarters of customers are on these lucrative contracts.”
“With a cap it would be very hard for the Big Six to generate the kind of profits they have been able to.”
He added: “With the Conservatives almost certain to win a majority, it’s highly likely the pledge will be carried out.
“It does seem that a wave of 10 per cent price hikes this spring was bad timing for companies who maybe thought they had a few more years until a general election and who didn’t bank on the Conservatives going down this route.”
London-listed energy providers Centrica and SSE were both down in early trading; both stocks feature among the top 10 holdings of several fund managers. As at 11.47, SSE share price was down by 0.83 per cent while Centrica had fallen by 1.55 per cent at 11.48.
Centrica is a top holding for managers in both the IA UK All Companies sector as a recovery play, and the IA UK Equity Income sector for its dividends. However
Source: FE Analytics
However, Wilson says price capping might help Centrica, which has shed 261,000 home energy accounts over the past year.
He said: “Centrica is losing a lot of these customers to smaller providers – we now have dozens of tiny energy providers competing with the Big Six who might not survive a cap, reducing competition and making life a little easier for the likes of Centrica and SSE.”
Performance of Centrica and SSE over 1yr
Source: FE Analytics
Earlier this week, before May’s announcement, The Share Centre investment research analyst Graham Spooner noted that the firm had come under political pressure to reduce prices and had been in dialogue with the UK government on alternative ways to improve the domestic energy market.
He said: “As the UK’s largest supplier of gas in the UK, the company regularly comes under pressure from politicians, consumers and watchdogs as a result of its charges.
“Indeed, the share price has been struggling to make any headway, on the back of comments from politicians on both sides of the house regarding capping prices in UK energy market.”
Spooner added: “We feel the share price, which has underperformed over the last year, will struggle to make a significant recovery until there is further clarity from its strategic review and over the wholesale gas price.
“Combine this with mild weather hitting demand, falling oil and gas prices and analyst earnings concerns, we continue to recommend Centrica as a ‘hold’ for medium risk income seekers only.”