The UK’s ‘Big Six’ energy suppliers may suffer a knock to earnings by new legislation that puts a cap on energy and gas bills.
The cap will apply to about 18mln accounts that use standard variable tariffs at least until 2020, and possibly be extended to 2023 if deemed necessary, under draft legislation to be laid out by the government later today.
The Draft Domestic Gas and Electricity (Tariffs Cap) Bill to be presented before Parliament will require regulator Ofgem to implement the cap “as soon as practically possible”, the government said in a statement.
Energy price cap unlikely to take place before winter
However, the ceiling on energy and gas bills is not expected to take effect until the winter of 2018/19 at the earliest.
The government said it will be an absolute cap where the gap between an energy supplier’s cheapest and most expensive tariffs are restricted.
Prime Minister Theresa May said: “I have been clear that our broken energy market has to change – it has to offer fairer prices for millions of loyal customers who have been paying hundreds of pounds too much.”
She added: “Today’s publication of draft legislation is a vital step towards fixing that, and in offering crucial peace of mind for ordinary working families all over the country.”
Energy suppliers face potential hit to earnings
The move will particularly impact Centrica where retail energy makes up over a third of its earnings before interest, tax, depreciation and amortisation.
“Given the sharp reductions in share prices of Centrica and negative impacts on other retailers in the last two weeks, we believe this news is largely discounted in share prices in the near term, though it removes any hope people may have had that Ofgem would oppose application of a more general cap,” Deutsche Bank said, issuing a ‘sell’ rating and target price of 160p.
Wide-ranging cap criticised
Comparison site uSwitch.com criticised the government for implementing a wide-ranging cap, rather than a limited one.
“The proposal for a widespread price cap verges on negligence by the government,” said Richard Neudegg, head of regulation at uSwitch.com. “They are sending out completely the wrong message by suggesting that a price cap will improve the retail energy market.”
Alex Neill, managing director of home products and services at consumer group Which?, warned that while the cap might sound like a positive move for customers, the government must be careful that it does not undermine customer service and push up prices as a whole.