Liberum the impact_of_freezing_uk_energy_prices

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  1. 1. The impact of freezing UK energy prices January 2014 Peter Atherton Research +44 (0) 20 3100 2088 peter.atherton@liberum.com Mulu Sun Research +44 (0) 20 3100 2193 mulu.sun@liberum.comRopemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 www.liberum.com Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554This report is prepared solely for the use of Broking Ideas of Liberum
  2. 2. The impact of freezing UK energy pricesBackground and contents Labour leader Ed Miliband pledged at the partys 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 MSCI UK Utils vs. Euro ex-UK Utils (five years before Ed Miliband speech) MSCI UK Utils MSCI UK Utils - Relative performance since Miliband speech One-year share price performance before Miliband speech Share price performance since Miliband speech Centrica lost market cap (m, absolute) SSE lost market cap (m, absolute) Centrica & SSE combined lost market cap (m, absolute) Centrica & SSE combined lost market cap (m, relative to FTSE100) MSCI UK Utils lost market cap Why so damaging? How will this play out if Labour is ahead in the polls? The Affordability Crisis3 5 6 7 8 9 10 12 13 14 15 16 17 182This report is prepared solely for the use of Broking Ideas of Liberum
  3. 3. The impact of freezing UK energy pricesCentrica & SSE One year relative performance before Labour leader Ed Milibands speech on Sept. 24, 2013110105100959085CentricaSSEAug-13Jul-13Jun-13May-13Apr-13Mar-13Feb-13Jan-13Dec-12Nov-12Oct-12Sep-1280FTSE 100Source: Bloomberg3This report is prepared solely for the use of Broking Ideas of Liberum
  4. 4. The impact of freezing UK energy pricesCentrica & SSE Relative performance since Miliband speech1009080CentricaSSEJan-14Dec-13Nov-13Oct-13Sep-1370FTSE100Source: Bloomberg4This report is prepared solely for the use of Broking Ideas of Liberum
  5. 5. The impact of freezing UK energy pricesMSCI UK Utilities vs. Euro, ex-UK, Utilities (five years before speech) MSCI UK Utilities vs. Euro, ex-UK, Utilities200180160140120100806040200 Sep-08Sep-09Sep-10 MSCI UK UtilsSep-11Sep-12Sep-13MSCI Euro ex-UK UtilsSource: Liberum, Bloomberg5This report is prepared solely for the use of Broking Ideas of Liberum
  6. 6. The impact of freezing UK energy pricesMSCI UK Utilities index Relative one- year performance before Milibands speech1301201101009080MSCI UK UtilsAug-13Jul-13Jun-13May-13Apr-13Mar-13Feb-13Jan-13Dec-12Nov-12Oct-12Sep-1270MSCI ex-UK UtilsSource: Bloomberg6This report is prepared solely for the use of Broking Ideas of Liberum
  7. 7. The impact of freezing UK energy pricesMSCI UK Utilities relative performance since speech MSCI UK Utilities vs. MSCI Euro ex-UK Utilities100959085MSCI UK UtilsJan-14Dec-13Nov-13Oct-13Sep-1380MSCI ex-UK UtilsSource: Bloomberg7This report is prepared solely for the use of Broking Ideas of Liberum
  8. 8. The impact of freezing UK energy pricesOne-year share price performance before Miliband speech Centrica and SSE versus E.ON and RWE13012011010090807060CentricaSSEE.ONAug-13Jul-13Jun-13May-13Apr-13Mar-13Feb-13Jan-13Dec-12Nov-12Oct-12Sep-1250RWESource: Bloomberg8This report is prepared solely for the use of Broking Ideas of Liberum
  9. 9. The impact of freezing UK energy pricesShare price performance since Miliband speech Centrica and SSE versus E.ON and RWE12011511010510095908580CentricaSSEE.ONJan-14Dec-13Nov-13Oct-13Sep-1375RWESource: Bloomberg9This report is prepared solely for the use of Broking Ideas of Liberum
  10. 10. The impact of freezing UK energy pricesCentrica lost market cap (m, absolute) Centrica - lost market cap 5,0004,5004,0003,500m3,0002,5002,0001,5001,0005000 Sep-13Oct-13Nov-13Dec-13Jan-14Centrica Source: Bloomberg10This report is prepared solely for the use of Broking Ideas of Liberum
  11. 11. The impact of freezing UK energy pricesSSE lost market cap (m, absolute) SSE - lost market cap 3,0002,500m2,0001,5001,0005000 Sep-13Oct-13Nov-13Dec-13Jan-14SSE Source: Bloomberg11This report is prepared solely for the use of Broking Ideas of Liberum
  12. 12. The impact of freezing UK energy pricesCentrica & SSE combined lost market cap (m, absolute) Centrica & SSE - lost market cap 8,0007,0006,000m5,0004,0003,0002,0001,0000 Sep-13Oct-13Nov-13Dec-13Jan-14Combined Source: Liberum, Bloomberg12This report is prepared solely for the use of Broking Ideas of Liberum
  13. 13. The impact of freezing UK energy pricesCentrica & SSE combined lost market cap (m, relative to FTSE100) Centrica & SSE lost market cap 9,0008,0007,0006,000m5,0004,0003,0002,0001,0000 Sep-13Oct-13Nov-13Dec-13Jan-14Combined Source: Liberum, Bloomberg13This report is prepared solely for the use of Broking Ideas of Liberum
  14. 14. The impact of freezing UK energy pricesMSCI UK Utilities lost market cap (m, relative to MSCI Euro Utilities, ex-UK) 12,00010,000m8,0006,0004,0002,0000 Sep-13Oct-13Nov-13Dec-13Jan-14MSCI UK Utils Source: Liberum, Bloomberg14This report is prepared solely for the use of Broking Ideas of Liberum
  15. 15. The impact of freezing UK energy pricesWhy 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?15This report is prepared solely for the use of Broking Ideas of Liberum
  16. 16. The impact of freezing UK energy pricesHow 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 be16This report is prepared solely for the use of Broking Ideas of Liberum
  17. 17. The impact of freezing UK energy pricesThe 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 payingEverything else is kicking the can down the road17This report is prepared solely for the use of Broking Ideas of Liberum
  18. 18. The impact of freezing UK energy pricesDisclaimer This material is the commercial property of Liberum and may not be disclosed or distributed to any third party without the express permission of Liberum. You shall not remove or modify any disclaimer or copyright or trademark notice contained in any Material. If you have received this material in error, please immediately notify the sender and destroy the material. This Material is for information only and it should not be regarded as an offer to sell or a solicitation of an offer to buy. It is based on current public information and/or from sources which Liberum believes to be reliable, but the accuracy, completeness, timeliness or correct sequencing of the information included herein cannot be guaranteed. Neither Liberum nor any source will be liable for the accuracy of, or availability of, such information or will have any duty to verify, correct, complete or update any material. Neither Liberum nor any source will be liable for any loss, cost, claim or damage (including direct, indirect or consequential damages or lost profits) arising out of or otherwise relating to any material or the use or access to or unavailability of any material. Any information or opinions contained herein are subject to change without notice. Unless stated otherwise, this material is not investment research or a research recommendation for the purposes of FCA rules or a research report under U.S. securities laws. It is provided on the understanding that Liberum is not acting in a fiduciary capacity and it is not a personal recommendation to you. The securities referred to may not be suitable for you and this material should not be relied upon in substitution for the exercise of independent judgement. Liberum and/or its officers, directors and employees may have or take positions in securities of compani