LONDON May 15 British Prime Minister Theresa
May's proposal to cap household energy prices if she is
re-elected in June could mean a 600 million pound a year hit to
the earnings of the country's "Big Six" energy companies and
thousands of job cuts, Deutsche Bank said on Monday.
The squeeze on margins could also potentially push Innogy
, which owns Npower, to exit the UK retail market
altogether, the bank said.
May has pledged to cap standard variable tariffs if the
Conservative Party wins the election on June 8 due to a doubling
of energy bills in Britain over the past decade.
The British market is dominated by six big providers -
Centrica, SSE, Scottish Power,
Innogy-owned Npower, E.ON and EDF Energy
- which account for about 85 percent of the retail
The industry has argued that a price cap would wipe out
competition and damage investment.
Deutsche Bank analysts expect April 2018 to be the likely
start date for the price cap and expect all of six companies to
experience a squeeze of around 2 percent on UK retail margins.
The cap could cut Centrica and SSE's EBIT (core) margins for
their retail divisions to 3 percent from 5 percent.
"This is a squeeze in earnings for the big six combined of
about 600 million pounds ($775.74 million) per annum, with
Centrica being hit by about 200 million pounds/pa and SSE by
about 100 million pounds," they said in a research note.
Big cost cuts will be needed to limit the impact on
earnings, the bank said. For example, Centrica might need to cut
an additional 200-400 million pounds a year off its 1.6 billion
pounds per year energy supply operating costs.
The price cap could also prompt customers to switch energy
suppliers, accelerating customer losses and resulting in job
losses for the retail industry of 5,000-10,000, the bank added.
The cap could also force Innogy to sell off its UK retail
customers, close its business down altogether or merge with
another player to bring down costs.
"We believe a price cap might prompt a UK retail exit for
Innogy while E.ON may struggle to secure any value from its
business," Deutsche Bank said.
Last week, Innogy said it had lost another 200,000 customers
in Britain and warned of further cost cuts at its Npower
business, which is no longer expected to make a profit this year
because of growing competition.
German rival E.ON has also warned of tougher conditions in
the British retail market. Although E.ON stands a better chance
of adapting to a price cap than Innogy, its exit from UK retail
might not be completely out of the question, Deutsche Bank said.
For EDF and Iberdrola, UK retail forms a smaller part of
group earnings and equity value.
EDF is unlikely to consider exiting the UK retail market due
to its large nuclear, fossil fuel and renewable generation
business but a price cap will still cut its UK retail market
"For Iberdrola, we estimate an effect on group earnings of
perhaps 1-2 percent which the company may be able to offset with
cost cutting across the group," Deutsche Bank said.
($1 = 0.7735 pounds)
(Reporting by Nina Chestney. Editing by Jane Merriman)