Liberum the impact_of_freezing_uk_energy_prices

The impact of freezing UK energy prices

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Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554

January 2014

Peter Atherton Research+44 (0) 20 3100 [email protected]

Mulu Sun Research+44 (0) 20 3100 [email protected]

This report is prepared solely for the use of Broking Ideas of Liberum


Background and contents

Labour leader Ed Miliband pledged at the party’s conference on September 24th, 2013 to freeze UK gas and electricity bills for 20 months if it wins a May 2015 general election. In this presentation made at a Cornwall Energy conference in London on January 23, 2014, Liberum Utilities analyst Peter Atherton reviews the impact of that commitment. His colleague Mulu Sun contributed to the presentation.

Centrica & SSE 3MSCI UK Utils vs. Euro ex-UK Utils (five years before Ed Miliband speech) 5MSCI UK Utils 6MSCI UK Utils - Relative performance since Miliband speech 7One-year share price performance before Miliband speech 8Share price performance since Miliband speech 9Centrica – lost market cap (£m, absolute) 10SSE – lost market cap (£m, absolute) 12Centrica & SSE – combined lost market cap (£m, absolute) 13Centrica & SSE – combined lost market cap (£m, relative to FTSE100) 14MSCI UK Utils – lost market cap 15Why so damaging? 16How will this play out if Labour is ahead in the polls? 17The Affordability Crisis 18

2This report is prepared solely for the use of Broking Ideas of Liberum


Centrica & SSE

One year relative performance before Labour leader Ed Miliband’s speech on Sept. 24, 2013

Source: Bloomberg

80

85

90

95

100

105

110

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Ap

r-13

May

-13

Jun-

13

Jul-

13

Aug

-13

Centrica SSE FTSE 100



Centrica & SSE

Relative performance since Miliband speech

Source: Bloomberg

70

80

90

100

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Centrica SSE FTSE100



MSCI UK Utilities vs. Euro, ex-UK, Utilities (five years before speech)

MSCI UK Utilities vs. Euro, ex-UK, Utilities

Source: Liberum, Bloomberg

0

20

40

60

80

100

120

140

160

180

200

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

MSCI UK Utils MSCI Euro ex-UK Utils



MSCI UK Utilities index

Relative one- year performance before Miliband’s speech

Source: Bloomberg

70

80

90

100

110

120

130

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Ap

r-13

May

-13

Jun-

13

Jul-

13

Aug

-13

MSCI UK Utils MSCI ex-UK Utils



MSCI UK Utilities relative performance since speech

MSCI UK Utilities vs. MSCI Euro ex-UK Utilities

Source: Bloomberg

80

85

90

95

100

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

MSCI UK Utils MSCI ex-UK Utils



One-year share price performance before Miliband speech

Centrica and SSE versus E.ON and RWE

Source: Bloomberg

50

60

70

80

90

100

110

120

130

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Ap

r-13

May

-13

Jun-

13

Jul-

13

Aug

-13

Centrica SSE E.ON RWE



Share price performance since Miliband speech

Centrica and SSE versus E.ON and RWE

Source: Bloomberg

75

80

85

90

95

100

105

110

115

120

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Centrica SSE E.ON RWE



Centrica – lost market cap (£m, absolute)

Centrica - lost market cap

Source: Bloomberg

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

£m

Centrica



SSE – lost market cap (£m, absolute)

SSE - lost market cap

Source: Bloomberg

0

500

1,000

1,500

2,000

2,500

3,000


£m

SSE



Centrica & SSE – combined lost market cap (£m, absolute)

Centrica & SSE - lost market cap


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


£m

Combined



Centrica & SSE – combined lost market cap (£m, relative to FTSE100)

Centrica & SSE – lost market cap


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


£m

Combined



MSCI UK Utilities – lost market cap

(£m, relative to MSCI Euro Utilities, ex-UK)


0

2,000

4,000

6,000

8,000

10,000

12,000


£m

MSCI UK Utils



Why was the speech so damaging?

• The compact between industry & policy makers has been broken

• Labour effectively wants supply businesses to suck policy-driven cost increases for two years

• Returns on investment are entirely dependent on public policy – so investors need to trust politicians

• Specific threat to supply companies…

• …but risk has increased across the sector. Who is next?

• The ‘Everest’ scale of required investment lies ahead, not behind

• The cost of capital must have increased

• Experience from Europe holds few comforts for investors

• Can investors trust politicians to defend both higher prices AND higher profits that naturally flow from the £200bn+ required investment?



How will this play out if Labour is ahead in the polls?

• Supply companies will seek to reduce their risk exposure to a freeze

• Inevitably they will have to try and fix volumes and price ahead of 2015/16

• This is very likely to push up wholesale gas and power prices…

• ….just as world energy prices could be falling

• Would expose independent suppliers to potentially ruinous risk

• So costs to consumers are very likely to be higher than they otherwise would be



The Affordability Crisis

• UK government policy, with all-party support, is consciously and specifically designed to increase the unit cost of energy

• Policy makers forecast that unit cost increases will be offset by energy efficiency gains

• Policy makers expect the world to face rising fossil fuel and/or carbon prices over the coming decades

• Therefore UK/EU energy policy will, in the long run, deliver lower-cost energy compared with a fossil-fuel based system

• So policy makers think the affordability crises will resolve itself in the long term. But…

• …policy makers recognise that costs to consumers may rise during the transition phase

• Very big risk that assumptions on energy efficiency and world prices prove to be wrong

• Therefore affordability crises might last a lot longer than expected and/or not resolve itself in the long term

• In reality there are only two potential solutions:a. Rebalance energy policy to reduce cost pressures or… b. Convince the British public that these costs are a price worth paying

Everything else is kicking the can down the road


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