Expect improved margins from power utilities this year if npower's 12.7 per cent increase in electricity prices and 17.2 per cent rise in gas bills for domestic customers is an indication of the price hikes we'll see across the sector. Soaring wholesale energy costs have necessitated the move, says npower, and it expects its rivals to follow suit with similar rises. Wholesale prices have been driven up by a number of factors, including the cold weather and rampant oil prices. npower says that other cost pressures, such as increased gas and electricity distribution and transmission costs, are also to blame. So, a bad start to the year for consumers, but potentially a good one for shareholders.
Deal-making could also be the order of the day for power utilities in 2008, helping to drive prices. Scottish & Southern (SSE) has kicked off the year with a deal that secures its place as the largest wind farm operator in the UK, with the €1.08bn (£808m) acquisition of Airtricity. And that was its second deal this year - the first saw it buying Slough Heat and Power for £49m. Shares in British Energy (BGY) ramped up in the first week of the year on rumours that it could be taken out by a European utility company. EDF, Eon and npower parent company RWE have been mentioned as potential suitors for British Energy.
However, the government's commitment to include nuclear power in the UK's energy mix over the next 40 years, which will result in new power stations being built, may also have helped to boost shares in electricity suppliers, analysts say. And a note from broker Cazenove, pointing to the value in British Energy's share price, was an added fillip for the group. British Energy has been under pressure due to the scale of the operational difficulties facing its ageing power stations. The group is due to provide an update on the state of five reactors it was forced to shut last year, ahead of third-quarter results in February. British Energy is not the only utility that may have caught the eye of foreign predators; International Power is rumoured to be the focus of a possible takeover by Japan's Mitsui.
