LDN - Business

British PM May vows energy price cap if re-elected

[May 09, 2017] By Kate Holton and Karolin Schaps

LONDON (Reuters) - British Prime Minister Theresa May pledged on Tuesday to cap household energy prices if she is re-elected on June 8, sending share prices tumbling with the biggest market intervention since the sector was privatized almost 30 years ago.

Energy bills have doubled in Britain over the past decade to about 1,200 pounds ($1,500) a year, putting the biggest providers in the line of sight of politicians and voters who are already battling rising inflation and limited wage growth.

May has previously praised free markets but has also said she would intervene in industries deemed to be dysfunctional. She said on Tuesday a move to cap energy standard variable tariffs would help about 17 million families.

"Like millions of working families, I am fed up with rip-off energy prices," she wrote in the Sun newspaper, the country's biggest selling title. "I expect (this) to save families on poor value tariffs as much as 100 pounds."

Shares in Centrica <CNA.L>, which owns household energy supplier British Gas, fell as much as 5 percent in early trading, adding to the 10 percent fall recorded since the start of the year. SSE <SSE.L> fell as much as 3 percent.

Analysts at RBC Capital Markets said the main reason for Tuesday's share price reaction was that May said the cap would apply to all standard tariffs, rather than just those customers deemed as vulnerable, as previously expected.

Britain's competition body in 2016 ordered suppliers to cap prices for customers on prepayment meters but the latest plan by May's Conservative Party would mark the first time since privatization of the industry in 1990 that a government intervenes to cap prices across the market.

The industry has argued that a price cap would wipe out competition and damage investment. Centrica Chief Executive Iain Conn said last month the plan suggested some in May's government did not believe in free markets.

"We believe that price regulation will result in reduced competition and choice, stifle innovation and potentially impact customer service," Conn said on Monday.

The Confederation of British Industry, which represents the country's biggest companies, also voiced concern.

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Britain's Prime Minister Theresa May attends a campaign event in York, May 9, 2017. REUTERS/Phil Noble

"A major market intervention, such as a price cap, could lead to unintended consequences, for example dampening consumers' desire to find the best deal on the market and hitting investor confidence," it said.

The ruling Conservative Party, which is about 20 points ahead in the opinion polls of the opposition Labour Party, said the current system had failed.

In its 2016 report, the competition watchdog said British households had overpaid 1.4 billion pounds a year in the previous three years due to uncompetitive standard tariffs.

Under the new plan, industry regulator Ofgem will set a maximum cap for standard variable tariffs, which are used by about two-thirds of households. Asked how the industry would fund the lower prices, Business Secretary Greg Clark said the big providers were still inefficient and could make savings.

The policy echoes a pledge made by the Labour party before the 2015 election. Its plans for a cap on price hikes were lambasted at the time by the Conservatives who accused the then leader Ed Miliband of wanting to live in a "Marxist universe".

The British energy market is dominated by Centrica, SSE and Scottish Power, Npower <IGY.DE>, E.ON <EONGn.DE> and EDF Energy <EDF.PA>. For Centrica and SSE, the two most exposed to Britain, a price cap could limit their ability to increase dividends.

Both are forecast to pay a dividend yield of more than 6 percent this year, compared with a current yield for the FTSE 100 of nearly 4 percent.

However, Conn said Centrica's UK energy supply business makes up only a quarter of its operating cashflow.

"If (that business) is impacted it's not going to fundamentally mean that we've got to change direction," he told journalists on Monday.

The Labour Party said the policy lacked any details and did not guarantee that bills would not go up.

(Additional reporting Nina Chestney in London and Subrat Patnaik in Bengaluru; Editing by Guy Faulconbridge and Edmund Blair)

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