Analysts see 10% downside from Ofgem warning to energy suppliers

11th Jun 2014 11:09

Analysts predict around 10% downside to earnings for the 'Big 6' energy suppliers after regulator Ofgem urged them to explain to consumers why falling wholesale prices had not been passed through to household bills.The regulator wrote to the energy suppliers, outlining that "failure to engage with consumers on this issue further risks undermining public confidence in the energy market if wholesale costs continue to fall".Ofgem noted that in recent months, both wholesale gas and electricity prices have been falling significantly, with prices falling to their lowest level since mid-2010 and both much lower than at the same point last year.It acknowledged upward pressures on energy costs resulting from government schemes to support environmental objectives as well as energy network renewal, but said the costs of wholesale power and gas "dwarfed" these pressures as they made up "just under half the total household bill".Its concern that savings were not being passed on to customers was one of the reasons why it has proposed to refer the energy market to the Competition and Markets Authority for investigation.Deutsche Bank said that, while some investors may be relieved that wholesale costs for retailers were falling and that Ofgem was not threatening a forced price cut, the regulator's action "highlights a downside risk" for group earnings for British Gas owner Centrica and SSE. "Fully passing through wholesale price weakness would see upstream profits cut and retail profits flat," analysts warned in a note, suggesting downside risk to earnings per share of up to 10% for 2015. Both SSE and Centrica have pledged or suggested prices will be frozen but neither have moved to lower prices. Analysts at UBS pointed out that energy companies purchased wholesale supplies using forward contracts at prices for this coming winter averaging around 19% and 14% above current gas and electricity price levels, respectively, which it said was likely to be misleading for many consumers, media, politicians, and which had not been acknowledged by Ofgem. Nevertheless, it said Ofgem's statement will increase political risk perception. "Whilst we agree there should be more dialogue between retailers & consumers, low levels of trust in the retailers make this challenging, especially whilst issues such as forward contracting are often not understood," analysts wrote. UBS's has a 'buy' recommendation on SSE and a 'sell' on Centrica, "partially through lower exposure to UK retail political risk, though Ofgem's statement will increase risk perceptions for both companies ahead of the 2015 election". OH