UK Price Caps Pose Risk for Retailers: Ratings Agency

Ratings agency Moody’s is expecting regulatory intervention in the UK retail energy market which will have repercussions for suppliers such as Centrica and SSE (former Scottish & Southern Energy), it said June 27.

Some sections of the Conservative Party manifesto have been dropped from the legislative programme, as laid out in the Queen's speech, because the party failed to win an overall majority in the June general election. However the commitment to lower prices remains, and Moody's said "an intervention in the market is now highly likely, raising regulatory risks that are credit negative for energy suppliers."

Its report notes that supplying energy to households contributes 38% of Centrica’s operating profits and 17% of SSE’s operating profits. It said: "The promise to extend price caps to 'more' customers on 'poor value standard variable tariffs' (SVT) was substantially unchanged. Standard variable tariffs (SVTs) are the energy supply contracts used by most residential consumers in Britain."

Companies have used the higher revenues from SVT customers to subsidise the lower price offers they make in order to tempt new customers. Customers are not locked into term contracts and so can change supplier at short notice if they see a better offer.

The government has said that it is considering whether the price cap should be implemented “through action by the regulator or legislation.” Expanding on this, business and energy secretary Greg Clark sent a letter to the energy regulator Ofgem June 21, noting that “Ofgem has powers available that would allow it to address the problems in the market that we now see,” and asking Ofgem to set out what actions it intends to take. We would regard a policy devised by a highly regarded regulator as less risky for the sector than one driven by the government."

Ofgem replied the same day, saying it shared the "government's concern that the energy market needs to work better for all consumers and that energy companies need to do more to help loyal consumers get a better deal... We will shortly be setting out the work we have underway and further options we can explore in the light of the government’s plans.”

The anti-trust agency Competition and Markets Authority carried out a comprehensive and independent analysis of the retail market and whether the Big Six retailers could be colluding or if household prices were unnecessarily high, but found nothing seriously wrong in its report published June last year. The UK's other four big retail suppliers are E.ON and RWE (from Germany), France's EDF, and Spain's Iberdrola which owns ScottishPower.

At its Capital Markets Day last week, Centrica CEO Iain Conn said he did not believe in any form of price regulation and that Centrica continued to engage constructively with the government and the regulator.

William Powell