Cap could have ‘severe’ impact on profits, analysts warn

Investec predicts a £961 yearly cap could cut profit margins

Analysts have warned the introduction of a price cap could have a “severe” impact on the profits of energy suppliers.

In a briefing note published today (6 October), Investec claims the even if Ofgem reassesses efficient cost benchmarks, the introduction of a cap could have “considerable financial and industrial impact” on suppliers and also affect half of the domestic market.

Speaking at the Conservative party conference earlier this week, prime minister Theresa May confirmed draft legislation to cap standard variable tariffs will be published next week.

The Investec note warns the existing prepayment cap has already set a tough benchmark on efficiency.

According to the report, the existing cap “implies” an average price cap will be around £961 a year, which is £170 below the current SVT prices from the Big Six.

The saving is higher than Investec’s previous estimate of £130, following the 12.5 per cent price rise by British Gas in August, which it said affected 30 per cent of the domestic accounts in the market.

It adds the effective profit margin in the anticipated cap is £25 or 2.3 per cent.

In the short term, the note predicts lower profit margins, indirect cost inefficiencies and wholesale energy hedging strategies, which are “mismatched with the cost allowance in the cap”.

It adds in the medium term, wholesale efficiencies/inefficiencies are “not relevant”.

“Adjustments to fixed tariffs offer little scope to protect profits, in our view, since the SVT cap is a de factor cap on all tariffs,” the note states.

‘In fact, SSE and Centrica’s cheapest fixed tariffs are prices above the level of the anticipated SVT cap.”