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Centrica rises on benign price cap proposals

Investors welcomed the increased regulatory certainty following more than a year of pressure on the energy supply sector
September 6, 2018

Shares in British-Gas owner Centrica (CNA) closed the day trading up 5 per cent, after energy regulator Ofgem published details of a price cap on standard variable tariff energy bills that was higher than analysts had been anticipating. The regulator proposed a cap at £1,136 per year for a typical dual fuel customer paying by direct debit. All but one of the 11 largest suppliers charge rates above this level, but analysts had expected the cap to be marginally lower. RBC Capital Markets put the consensus at £1,130, with a range of £1,101-£1,166. 

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Ofgem is working to have the cap in place by the end of the year and will run until 2020 initially. During this time the regulator will report on the competitiveness of the energy market and if it does not improve the government has the option to extend the cap out until 2023. The regulator will review the level every six months, but it will not stay at the current level for that long. The first increase will be announced in February 2019 and come into effect in April. Brokerage Bernstein said wholesale energy prices were more than 25 per cent higher than the level assumed in the cap, meaning the first increase was likely to be in the order of £108 per customer, plus a £15 increase in policy costs. 

Political pressure has loomed large in the energy sector since Jeremy Corbyn proposed nationalisation in the most recent Labour manifesto, putting the pressure on Conservatives to make a case for market-based solutions. Price controls combined with existing efforts to increase competition among suppliers should go some way to mollify critics of the sector, even if some impact on profits is inevitable. RBC said the impact on Centrica’s operating profit was unlikely to exceed £150m, which would account for roughly 12 per cent of 2017’s adjusted figure.