Centrica, SSE drop on May's energy cap plans

Utilities Centrica and SSE were under the cosh on Tuesday as Prime Minister Theresa May pledged to introduce a cap on domestic energy prices that could see prices drop for around 17 million families if she is re-elected on 8 June.

The cap would be introduced on standard variable tariffs, which around 70% of households are on. It would be set by energy regulator Ofgem every six months and would help close the gap between SVTs and the cheapest deals, potentially saving families on poor value tariffs as much as £100 a year, according to May.

RBC Capital Markets had expected Centrica and SSE to be weaker on the back of the news, which it said could create a worse deal for customers on average.

Meanwhile, Neil Wilson, senior market analyst at ETX Capital, said the move to cap prices would be a massive hit to the industry, costing Centrica something like £200m and making it much tougher for the firm to reintroduce its progressive dividend policy. Wilson pointed out that like other providers, it relies heavily on these SVTs, with around three-quarters of customers 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. 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% 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.

"Centrica is also losing customers - shedding 261,000 Home Energy accounts in the last year. But a price cap might just help. 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."

Josh Hardie, deputy director-general of the CBI, said: "A major market intervention, such as a price cap, could lead to unintended consequences, for example dampening consumers’ desire to find the best deal on the market and hitting investor confidence.”

At 0900 BST, Centrica shares were down 3.6% to 195.10p, while SSE was off 1.9% to 1,422p and National Grip was down 0.6% to 1,022p.