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Centrica caught in crossfire politics
00:00, 18 February 2014
When stock markets dropped sharply during the financial crisis a few years ago utility companies were a relative haven amidst a maelstrom of volatility. While financial firms were caught in the cross fire of politicians lining up to score political points, the share prices of companies like Centrica were relative havens of tranquillity, with the added comfort of a fairly decent dividend in a period of rock bottom interest rates. The political climate has changed somewhat since then and the power companies have now become subject to intense scrutiny over how they set energy prices at a time when wage growth has been lagging well below inflation. While it is undoubtedly true that the energy companies have brought a lot of the current opprobrium on themselves due to the opaque way energy prices are set, the way politicians have gone about seeking to make political capital out of the way energy prices have increased over the past few years has been one of using a sledgehammer to crack a nut. Last year’s intervention by Labour leader Ed Miliband to promise to cap energy prices was the opening salvo which helped torpedo the share prices of energy companies in the last six months with Centrica’s share price dropping almost 20% since its September highs. Not only that the companies are also having to cope with falling consumption, at a time when consumers are becoming much more energy aware and energy efficient, while the fairly mild winter temperature wise has also seen demand fall relative to the cold temperatures seen last year. Given the current spotlight on how the companies set their bills any future price rise is likely to prove to be difficult to justify in the current political climate. Not only that the company has had to contend with a rather misguided intervention by energy minister Ed Davey when he called for the breakup of the Centrica’s British Gas division in order to tackle the gas suppliers market dominance in the downstream business. Given this backdrop this week’s results could well be politically contentious if there is a perception amongst the political elite that profits are too high, yet without a decent level of profits, reinvestment into future potential UK energy projects would be next to impossible, even in a normal regulatory environment. In the past year we’ve seen Centrica drop out of a UK energy project to build new nuclear power stations, as well as an offshore wind farm project, which given the UK’s potential power shortfall would have produced some form of urgency to adopt a forward looking energy policy. As things stand companies looking to invest into UK energy are more than likely be minded to steer well clear until after the political dust has settled, post-election next year, and this is likely to limit any further gains in the Centrica share price over the coming months, despite a dividend yield of over 5%. Not only that these interventions are likely to make it much more difficult to persuade any energy company to invest towards the UK’s future energy needs in the current toxic political environment, a classic case of a political own goal and political short termism, outweighing what is best for the UK’s long term energy needs as a whole. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.