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Independent suppliers will account for more than a quarter of the UK energy market by 2019, analysts at Jefferies have predicted.
They will grow their market share to 28 per cent – an 11 per cent increase – as the big six contend with “falling commodity prices, evolving regulation and heightened consumer awareness”.
The investment firm said it expects gas prices to fall by around 15 per cent over the period due to weak demand, plentiful global supplies of liquefied natural gas (LNG) and increasing competition between LNG exporters and “traditional pipeline gas suppliers”.
This, along with growing renewable and interconnector capacity, and weak demand for power, will to lead to around a 10 per cent decline in power prices, it said in a market update.
As a result, analysts predicted the big six will see a 22 per cent fall in their earnings before interest and taxation (EBIT) from supplying energy: “Centrica, being the dominant supplier, will be hit the hardest”.
They expressed skepticism over the way the British Gas owner had responded to the “the crisis in the generation sector” by shifting investment away from its upstream business and towards “downstream retail and ‘connected’ product businesses”: “We see risks to these investments given the global technology companies Centrica is set to compete with and take a cautious standpoint regarding achievable returns.”
By contrast, they said SSE is “best placed to weather the storms we see in UK energy supply and power markets”, having continued to “invest heavily in regulated networks and renewables”. Despite the differing predictions, they said both Centrica and SSE could expect to see their EBIT from the supply of energy to fall by 24 per cent.
The big six will get some relief from the capacity market, which is becoming “an important source of earnings for UK utilities”. Earlier this year the government announced that an extra year-ahead (T-1) auction for 2017/18 will be held in January so that it can close the Contingency Balancing Reserve a year early. Analysts predicted that the auction will clear at £20/KW and therefore boost SSE’s revenues by £85 million.
They predicted a clearing price of £35/KW for the four-year-ahead (T-4) auction due to be held in December. At this price the auction would bring in further £160 million for SSE.
In June, Morgan Stanley gave a rather different forecast when it said independents would struggle to gain market share in the same way they had done in recent years. It said the levelling out of wholesale gas and power prices following a decline in 2015, would make it more difficult for them to undercut the big six.
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