SSE sees profits double led by gas storage and generation

SSE has seen its first half profits almost double following a sharp rise in earnings from its gas storage and thermal generation divisions.

Adjusted operating profit for the six months to the end of September rose to £716 million, up from £376.8 million during the same period last year.

The largest increase by segment was from the group’s gas storage division where earnings jumped more than fivefold from £28.7 million to £147.8 million. SSE said higher and more volatile gas prices allowed its gas storage assets to capture the positive spreads that emerged between the winter and summer.

“In normal market conditions, the seasonal price spread occurs between summer and winter which results in minimal profitability for this segment in the first half of the year,” the company stated.

“However, due to low Russian gas supplies and increased European demand as gas stores were built up for winter, the usual spread was inverted, with summer gas prices higher than winter at points during the period. That inversion led to around £46 million of profits in the period, with a further £79 million of trading profits driven by the generally volatile market conditions.”

SSE said the assets are nevertheless well positioned to capture the usual winter spread, with more than 150 million therms of gas in storage as of the end of September, equating to 80% of its storage capacity.

The adjustments to earnings from gas storage included a £201 million reversal of a historic write down on the value of its Aldborough gas storage facility.

Meanwhile, adjusted operating profit from SSE’s thermal generation division nearly tripled from £36.1 million to £100.4 million due to increases in both the volume and price of sales, with the former rising by 27% when compared to the same period year. The company said the division had a strong performance in the balancing market in particular, helping to drive a £187 million increase in market revenues.

This increase was partially offset by £76 million of losses from power buy-backs due to unplanned outages, most notably, at its Great Island combined-cycle gas turbine plant, which was out of action for most of the period following a cooling system fault and a subsequent turbine overhaul.

Adjustments to the result included the reversal of £181.6 million of historic impairment charges and a £141 million gain on the acquisition of the Triton Power, which was bought by a 50:50 joint venture with Equinor for a sum that was agreed when power prices were lower.

Adjusted operating profit from SSE Renewables dropped by 11% to £22.5 million as a result power buybacks at very high prices. Although sales volumes increased by 0.8TWh following exceptionally dry and still weather during the same period last year, they were still 0.5TWh – or 13% – below planned levels due to more unfavourable weather conditions and delays to the construction of the Seagreen offshore wind project, the completion of which has been pushed back from spring to summer 2023.

Earning from SSE’s electricity transmission increased by 15% to £208.4 million due to the timing of investments, whilst profits from its electricity distribution business rose by 14% to £174.6 million, partly due to the recovery of allowances that were deferred during the coronavirus pandemic.

The company said it expects to reveal an agreement for the previously announced sale of a 25% stake in the transmission business within the “coming weeks”.

Adjusted pre-tax profits across the group jumped from £174.2 million to £559.4 million.

“The strength and optionality of our resilient mix of market-based and regulated businesses have shone through in this period, with recent trading conditions highlighting the true value to society of a portfolio that balances intermittent renewables with flexible generation when the system needs it most,” said SSE chief executive Alistair Phillips-Davies.

“Our business model and strategy are delivering for our stakeholders today, whilst creating future long-term societal value.”

Earlier this week, newspapers reported that chancellor Jeremy Hunt is considering introducing a windfall tax on electricity generators’ profits above a certain price per megawatt-hour as part of his Autumn budget statement to Parliament on Thursday (17 November). This would be instead of the revenue cap announced by former prime minister Liz Truss last month.

When asked about this possibility in a results call with journalists, Phillips-Davies responded: “In terms of levies, caps, windfall taxes, whatever that may be, if they’re fair and reasonable, then fine.”

But he added: “One of the things that we’ve got to be careful of in the UK is we’ve created an amazing environment for investors. We’ve got one of the renewables and green investment markets in the world. We’ve created the biggest offshore wind market in the world. It’s critical that we don’t endanger that, particular when all of that investment is going to be delivering energy throughout this decade at far lower costs than we’re currently importing energy.”

He continued: “In terms of things like renewables and non-flexible generation, I see a clear a case where there isn’t a gas input cost to try and de-link the electricity price from the gas price”.

“In terms of flexible generation, you’ve got to be more careful. Additional taxes or caps on generation could have significant implications for security of supply.”

Phillips-Davies said although SSE saw an “uptick” in profits from its gas generation and storage in its first half results, this followed “a number of years where we’ve seen suppressed, or in the case of gas storage, virtually no profitability whatsoever.”

He also said he expects renewable developers to struggle to bid into upcoming Contracts for Difference auctions at the record low strike prices seen in recent allocation rounds.

“Both the cost of capital and general inflationary pressures in materials and wages are going to have an impact and we’re going to see some cost inflation there,” he explained.

“Those bids came in when not all of the inflation that we’re seeing now had come through and the interest rate environment hadn’t turned as hard. In 2012 prices, that £37.35/MWh, I think will be very challenging to replicate any time soon. I do think that’s going to come up, not necessarily massively, but it will definitely turn upwards.”

Phillips-Davies said he likewise expects wholesale gas and power prices to remain around fifth higher than they were a couple of years ago, even when markets have “settled back down” following the end of the current energy crisis: “I do see fundamental inflation having baked itself in to the system for the balance of this decade.”