Upload
andrew-montford
View
454
Download
0
Tags:
Embed Size (px)
Citation preview
The impact of freezing UK energy prices
Ropemaker Place, 25 Ropemaker Street,London EC2Y 9LY / T: +44 (0)20 3100 2000www.liberum.com
Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554
January 2014
Peter Atherton Research+44 (0) 20 3100 [email protected]
Mulu Sun Research+44 (0) 20 3100 [email protected]
This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Background and contents
Labour leader Ed Miliband pledged at the party’s conference on September 24th, 2013 to freeze UK gas and electricity bills for 20 months if it wins a May 2015 general election. In this presentation made at a Cornwall Energy conference in London on January 23, 2014, Liberum Utilities analyst Peter Atherton reviews the impact of that commitment. His colleague Mulu Sun contributed to the presentation.
Centrica & SSE 3MSCI UK Utils vs. Euro ex-UK Utils (five years before Ed Miliband speech) 5MSCI UK Utils 6MSCI UK Utils - Relative performance since Miliband speech 7One-year share price performance before Miliband speech 8Share price performance since Miliband speech 9Centrica – lost market cap (£m, absolute) 10SSE – lost market cap (£m, absolute) 12Centrica & SSE – combined lost market cap (£m, absolute) 13Centrica & SSE – combined lost market cap (£m, relative to FTSE100) 14MSCI UK Utils – lost market cap 15Why so damaging? 16How will this play out if Labour is ahead in the polls? 17The Affordability Crisis 18
2This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Centrica & SSE
One year relative performance before Labour leader Ed Miliband’s speech on Sept. 24, 2013
Source: Bloomberg
80
85
90
95
100
105
110
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb
-13
Mar
-13
Ap
r-13
May
-13
Jun-
13
Jul-
13
Aug
-13
Centrica SSE FTSE 100
3This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Centrica & SSE
Relative performance since Miliband speech
Source: Bloomberg
70
80
90
100
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Centrica SSE FTSE100
4This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
MSCI UK Utilities vs. Euro, ex-UK, Utilities (five years before speech)
MSCI UK Utilities vs. Euro, ex-UK, Utilities
Source: Liberum, Bloomberg
0
20
40
60
80
100
120
140
160
180
200
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
MSCI UK Utils MSCI Euro ex-UK Utils
5This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
MSCI UK Utilities index
Relative one- year performance before Miliband’s speech
Source: Bloomberg
70
80
90
100
110
120
130
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb
-13
Mar
-13
Ap
r-13
May
-13
Jun-
13
Jul-
13
Aug
-13
MSCI UK Utils MSCI ex-UK Utils
6This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
MSCI UK Utilities relative performance since speech
MSCI UK Utilities vs. MSCI Euro ex-UK Utilities
Source: Bloomberg
80
85
90
95
100
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
MSCI UK Utils MSCI ex-UK Utils
7This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
One-year share price performance before Miliband speech
Centrica and SSE versus E.ON and RWE
Source: Bloomberg
50
60
70
80
90
100
110
120
130
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb
-13
Mar
-13
Ap
r-13
May
-13
Jun-
13
Jul-
13
Aug
-13
Centrica SSE E.ON RWE
8This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Share price performance since Miliband speech
Centrica and SSE versus E.ON and RWE
Source: Bloomberg
75
80
85
90
95
100
105
110
115
120
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Centrica SSE E.ON RWE
9This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Centrica – lost market cap (£m, absolute)
Centrica - lost market cap
Source: Bloomberg
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
£m
Centrica
10This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
SSE – lost market cap (£m, absolute)
SSE - lost market cap
Source: Bloomberg
0
500
1,000
1,500
2,000
2,500
3,000
Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
£m
SSE
11This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Centrica & SSE – combined lost market cap (£m, absolute)
Centrica & SSE - lost market cap
Source: Liberum, Bloomberg
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
£m
Combined
12This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Centrica & SSE – combined lost market cap (£m, relative to FTSE100)
Centrica & SSE – lost market cap
Source: Liberum, Bloomberg
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
£m
Combined
13This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
MSCI UK Utilities – lost market cap
(£m, relative to MSCI Euro Utilities, ex-UK)
Source: Liberum, Bloomberg
0
2,000
4,000
6,000
8,000
10,000
12,000
Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
£m
MSCI UK Utils
14This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
Why was the speech so damaging?
• The compact between industry & policy makers has been broken
• Labour effectively wants supply businesses to suck policy-driven cost increases for two years
• Returns on investment are entirely dependent on public policy – so investors need to trust politicians
• Specific threat to supply companies…
• …but risk has increased across the sector. Who is next?
• The ‘Everest’ scale of required investment lies ahead, not behind
• The cost of capital must have increased
• Experience from Europe holds few comforts for investors
• Can investors trust politicians to defend both higher prices AND higher profits that naturally flow from the £200bn+ required investment?
15This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
How will this play out if Labour is ahead in the polls?
• Supply companies will seek to reduce their risk exposure to a freeze
• Inevitably they will have to try and fix volumes and price ahead of 2015/16
• This is very likely to push up wholesale gas and power prices…
• ….just as world energy prices could be falling
• Would expose independent suppliers to potentially ruinous risk
• So costs to consumers are very likely to be higher than they otherwise would be
16This report is prepared solely for the use of Broking Ideas of Liberum
The impact of freezing UK energy prices
The Affordability Crisis
• UK government policy, with all-party support, is consciously and specifically designed to increase the unit cost of energy
• Policy makers forecast that unit cost increases will be offset by energy efficiency gains
• Policy makers expect the world to face rising fossil fuel and/or carbon prices over the coming decades
• Therefore UK/EU energy policy will, in the long run, deliver lower-cost energy compared with a fossil-fuel based system
• So policy makers think the affordability crises will resolve itself in the long term. But…
• …policy makers recognise that costs to consumers may rise during the transition phase
• Very big risk that assumptions on energy efficiency and world prices prove to be wrong
• Therefore affordability crises might last a lot longer than expected and/or not resolve itself in the long term
• In reality there are only two potential solutions:a. Rebalance energy policy to reduce cost pressures or… b. Convince the British public that these costs are a price worth paying
Everything else is kicking the can down the road
17This report is prepared solely for the use of Broking Ideas of Liberum
Disclaimer
The impact of freezing UK energy prices
This material is the commercial property of Liberum and may not be disclosed or distributed to any third party without the express permission of Liberum. You shall not remove or modify any disclaimer or copyright or trademark notice contained in any Material. If you have received this material in error, please immediately notify the sender and destroy the material.This Material is for information only and it should not be regarded as an offer to sell or a solicitation of an offer to buy. It is based on current public information and/or from sources which Liberum believes to be reliable, but the accuracy, completeness, timeliness or correct sequencing of the information included herein cannot be guaranteed. Neither Liberum nor any source will be liable for the accuracy of, or availability of, such information or will have any duty to verify, correct, complete or update any material. Neither Liberum nor any source will be liable for any loss, cost, claim or damage (including direct, indirect or consequential damages or lost profits) arising out of or otherwise relating to any material or the use or access to or unavailability of any material. Any information or opinions contained herein are subject to change without notice. Unless stated otherwise, this material is not investment research or a research recommendation for the purposes of FCA rules or a research report under U.S. securities laws. It is provided on the understanding that Liberum is not acting in a fiduciary capacity and it is not a personal recommendation to you. The securities referred to may not be suitable for you and this material should not be relied upon in substitution for the exercise of independent judgement.Liberum and/or its officers, directors and employees may have or take positions in securities of companies mentioned in this communication (or in any related investment) and may from time to time dispose of any such positions. Liberum may act as a market maker in the securities of companies discussed in this communication (or in any related investments), may sell them or buy them from customers on a principal basis, and may also provide corporate finance or underwriting services for or relating to those companies, for which it is remunerated.
United Kingdom and the rest of Europe: This material has been prepared and issued by Liberum. Liberum is a trading name of Liberum Capital Limited, who are authorised and regulated by the Financial Conduct Authority (FCA) and a member of the London Stock Exchange. Ropemaker Place, Level 12, 25 Ropemaker Street, London EC2Y 9LY.Tel +44 (0)20 3100 2000 Fax +44 (0)20 3100 2299United States: This communication is distributed to US institutional investors by Liberum Inc, which is a member of FINRA & SIPC. 441 Lexington Avenue (15th Floor), New York, NY 10017, Tel +1 212 596 4800 Fax +1 212 596 4898.
18This report is prepared solely for the use of Broking Ideas of Liberum