Liberum the impact_of_freezing_uk_energy_prices

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  • 1. The impact of freezing UK energy prices January 2014 Peter Atherton Research +44 (0) 20 3100 2088 peter.atherton@liberum.com Mulu Sun Research +44 (0) 20 3100 2193 mulu.sun@liberum.com Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 www.liberum.com Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554 This report is prepared solely for the use of Broking Ideas of Liberum
  • 2. 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 MSCI UK Utils vs. Euro ex-UK Utils (five years before Ed Miliband speech) MSCI UK Utils MSCI UK Utils - Relative performance since Miliband speech One-year share price performance before Miliband speech Share price performance since Miliband speech Centrica – lost market cap (£m, absolute) SSE – lost market cap (£m, absolute) Centrica & SSE – combined lost market cap (£m, absolute) Centrica & SSE – combined lost market cap (£m, relative to FTSE100) MSCI UK Utils – lost market cap Why so damaging? How will this play out if Labour is ahead in the polls? The Affordability Crisis 3 5 6 7 8 9 10 12 13 14 15 16 17 18 2 This report is prepared solely for the use of Broking Ideas of Liberum
  • 3. The impact of freezing UK energy prices Centrica & SSE One year relative performance before Labour leader Ed Miliband’s speech on Sept. 24, 2013 110 105 100 95 90 85 Centrica SSE Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 80 FTSE 100 Source: Bloomberg 3 This report is prepared solely for the use of Broking Ideas of Liberum
  • 4. The impact of freezing UK energy prices Centrica & SSE Relative performance since Miliband speech 100 90 80 Centrica SSE Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 70 FTSE100 Source: Bloomberg 4 This report is prepared solely for the use of Broking Ideas of Liberum
  • 5. 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 200 180 160 140 120 100 80 60 40 20 0 Sep-08 Sep-09 Sep-10 MSCI UK Utils Sep-11 Sep-12 Sep-13 MSCI Euro ex-UK Utils Source: Liberum, Bloomberg 5 This report is prepared solely for the use of Broking Ideas of Liberum
  • 6. The impact of freezing UK energy prices MSCI UK Utilities index Relative one- year performance before Miliband’s speech 130 120 110 100 90 80 MSCI UK Utils Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 70 MSCI ex-UK Utils Source: Bloomberg 6 This report is prepared solely for the use of Broking Ideas of Liberum
  • 7. The impact of freezing UK energy prices MSCI UK Utilities relative performance since speech MSCI UK Utilities vs. MSCI Euro ex-UK Utilities 100 95 90 85 MSCI UK Utils Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 80 MSCI ex-UK Utils Source: Bloomberg 7 This report is prepared solely for the use of Broking Ideas of Liberum
  • 8. The impact of freezing UK energy prices One-year share price performance before Miliband speech Centrica and SSE versus E.ON and RWE 130 120 110 100 90 80 70 60 Centrica SSE E.ON Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 50 RWE Source: Bloomberg 8 This report is prepared solely for the use of Broking Ideas of Liberum
  • 9. The impact of freezing UK energy prices Share price performance since Miliband speech Centrica and SSE versus E.ON and RWE 120 115 110 105 100 95 90 85 80 Centrica SSE E.ON Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 75 RWE Source: Bloomberg 9 This report is prepared solely for the use of Broking Ideas of Liberum
  • 10. The impact of freezing UK energy prices Centrica – lost market cap (£m, absolute) Centrica - lost market cap 5,000 4,500 4,000 3,500 £m 3,000 2,500 2,000 1,500 1,000 500 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Centrica Source: Bloomberg 10 This report is prepared solely for the use of Broking Ideas of Liberum
  • 11. The impact of freezing UK energy prices SSE – lost market cap (£m, absolute) SSE - lost market cap 3,000 2,500 £m 2,000 1,500 1,000 500 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 SSE Source: Bloomberg 11 This report is prepared solely for the use of Broking Ideas of Liberum
  • 12. The impact of freezing UK energy prices Centrica & SSE – combined lost market cap (£m, absolute) Centrica & SSE - lost market cap 8,000 7,000 6,000 £m 5,000 4,000 3,000 2,000 1,000 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Combined Source: Liberum, Bloomberg 12 This report is prepared solely for the use of Broking Ideas of Liberum
  • 13. The impact of freezing UK energy prices Centrica & SSE – combined lost market cap (£m, relative to FTSE100) Centrica & SSE – lost market cap 9,000 8,000 7,000 6,000 £m 5,000 4,000 3,000 2,000 1,000 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Combined Source: Liberum, Bloomberg 13 This report is prepared solely for the use of Broking Ideas of Liberum
  • 14. The impact of freezing UK energy prices MSCI UK Utilities – lost market cap (£m, relative to MSCI Euro Utilities, ex-UK) 12,000 10,000 £m 8,000 6,000 4,000 2,000 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 MSCI UK Utils Source: Liberum, Bloomberg 14 This report is prepared solely for the use of Broking Ideas of Liberum
  • 15. 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? 15 This report is prepared solely for the use of Broking Ideas of Liberum
  • 16. 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 16 This report is prepared solely for the use of Broking Ideas of Liberum
  • 17. 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 17 This report is prepared solely for the use of Broking Ideas of Liberum
  • 18. The impact of freezing UK energy prices Disclaimer 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 2299 United 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. 18 This report is prepared solely for the use of Broking Ideas of Liberum