Banks warn of big six profit risk after CMA report

Big six energy suppliers face a squeeze on profitability following the findings of the Competition and Markets Authority (CMA), market analysts have warned.

Although the CMA report findings were largely unsurprising, the raft of measures proposed to counter a lack of consumer engagement in the retail space includes plans to control the price of the standard variable tariff (SVT) to protect ‘sticky customers’.

Utilities analysts at Citigroup said the transitional regulated tariff is “a harsher remedy than what the market would have hoped” because it entails a risk on future regulation of the energy supply market if the incumbent players’ market shares, margins and tariffs do not appear to fall into line.

Citigroup added that Centrica’s profits are particularly at risk as the largest supplier in the market, with the highest number of customers on its SVT.

Centrica’s share price opened higher than the previous close on Tuesday morning but quickly fell to almost 1 per cent lower at 264.8 pence per share. SSE shares fell just over 0.5 per cent by 09.00 on Tuesday morning to 1,564 pence.

“[I]t is clear that there will be some downward pressure on profitability,” an investor note from RBC Capital said.

But the bank added that the CMA initial findings are “not likely to overly worry the big six”.

“Overall we believe there is little that will be regarded as game changing for the UK suppliers in the provisional findings and remedies which should be a relief for the likes of CNA and SSE,” said RBC Capital.

The impact on the suppliers could have been far greater if concerns over the vertical integration and market power of the incumbent players had resulted in harsher reforms from the CMA. The authority found no fault in terms of vertical integration, market power or wholesale market trading activities.