The uncertainty of fixed energy prices

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The draft strike prices, published so far, remain on track to be confirmed by the end of the year. There are a number of potential barriers that need greater clarity before investment decisions can be made. These include:

  • draft strike prices need agreeing;
  • royal assent is needed for the Energy Bill;
  • concern over state aid approval needs resolving, particularly for the Contract for Difference (CfD) element; and
  • political risk both from the EU in terms of forward energy policy and the UK as we move closer to an election in 2015.

The vote-attracting statement by Ed Miliband about fixing energy prices cannot have helped businesses relying on this sector either. The immediate effect has been worrying; hitting Centrica and SSE share prices and drawing highly critical comments from the energy sector and investors alike. The energy sector trade body Energy UK suggested that whilst the policy may appear “superficially attractive” it would also “freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone.”

The draft Energy Bill, the enabling legislation for the Electricity Market Reform (EMR), is currently still with the Lords and is due to return to the Commons imminently, with Royal Assent expected to follow towards the end of the year. So the beginning of 2014 may be a critical period where, if investors feel confident about CfDs and the longevity of the arrangements, capital finance may be invested and begin to disseminate through the supply chain.

Alternatively, if the Energy Bill or EMR takes longer to firm up and the political risk associated with Ed Miliband’s statement on energy prices takes hold, then the uncertainty may affect investors and the supply chain. As always, added uncertainty is not helpful for this market.

For more information, help or advice please contact Andrew Davison on 0191 211 7950.