On the heels of E.ON's decision to shave 3.5 per cent off gas bills, rival energy providers Centrica (CNA) and Scottish Power (SPW) plan to follow suit by cutting prices even further from next month. Centrica-owned British Gas announced it would cut gas bills by an average 5 per cent from 27 February, while Scottish Power said it would reduce its standard domestic gas prices by 4.8 per cent from a week earlier. Other members of the 'big six' energy suppliers are now under pressure to follow suit.
Wholesale gas prices have dropped to 45p/therm from 65p/therm in the past 12 months. Centrica said that, although most of the gas being used by customers currently was bought at higher 2013-14 prices, "our wholesale costs for 2015 are now reducing to a level where we can pass this reduction to our customers". The group said it would keep prices under review for further movements up or down, due to the volatility of wholesale gas prices.
Centrica has endured tough trading conditions during the past 12 months. In November it announced it had revised down its full-year adjusted earnings per share for 2014 to 19-20p from the 21-22p expected at the time of its interim results in June. This was attributed to above-average temperatures during the year to November 2014, in comparison with unusually cold conditions in 2013.
Analysts at Deutsche Bank said falling wholesale prices may give "headroom for the price cuts this year without hurting EPS, but long-term earnings will likely be lower with weak commodity prices".
Angelos Anastasiou, utilities analyst at Whitman Howard, said the potentially negative effects on the profitability of the supply side of Centrica and Scottish Power will be countered by the "positive perceptions and benefits for customers". But he added that lower wholesale gas prices may bring 2015's earnings down.
But the outlook seems worst for SSE (SSE), who will find it difficult to follow its rivals' lead in cutting gas prices. This is because the provider initiated a price freeze until at least January 2016, following Labour leader Ed Miliband's proposal for a freeze on household energy prices.
"What that means is that they have bought more further out, [for] the prices that were prevailing a year or so ago, which were much higher than they are now," Mr Anastasiou said.
