UPDATE 3-Price cap plan wipes more than 1 billion stg off UK energy firms
* Labour's power price freeze plan hits utilities stocks
* Proposal questions Britain's free-market energy model
* Government: plan risks security of supply and green targets
* Price freeze threat could lead to faster price hikes now (Adds energy price data)
By William James and Karolin Schaps
BRIGHTON/LONDON, Sept 25 (Reuters) - Shares in UK utilities fell on Wednesday after the market digested a plan by the opposition Labour party to freeze power and gas prices if elected in 2015, throwing Britain's liberalised energy industry into doubt.
More than 1 billion pounds ($1.61 billion) was wiped off the value of Britain's two biggest listed companies SSE and Centrica, each closing about 5.5 percent lower.
Labour's plan, set out by leader Ed Miliband on Tuesday, would involve capping business and consumer energy bills until January 2017, breaking a decades-old tradition of liberalised energy markets in Britain.
Unlike most of Europe, where one or two often state-owned companies dominate power markets and where regulated tariffs were the norm in 17 out of 27 EU countries in 2012, the UK market has six major players, which freely set prices.
But competition has not brought down prices as much as regulators had hoped. Last year, British households paid slightly more than the EU average at 13.82 euros per giga-Joule for gas and 0.16 euros per kilowatt-hour for electricity, Eurostat data shows.
Rising energy costs have become a hot political issue. Britons believe energy prices are the biggest threat to Britain's economy, ahead of unemployment and taxes, data from opinion poll provider YouGov showed.
"We've got a market that isn't working. Somebody has got to stand up and press the reset button on this market," Miliband told Sky News on Wednesday.
"I'm in favour of competition, I'm in favour of markets, but they have got to be effective markets and it's got to be effective competition," Miliband added.
Miliband was energy minister in 2008-2010 under the last Labour government and has long been in favour of tighter market supervision.
Energy Secretary Edward Davey said in a statement that government price fixing jeopardises investment in new power stations, making power cuts a real possibility and puts at risk Britain's transition to a green, low-carbon future.
A Labour source close to Miliband said on Tuesday the plan could cost energy suppliers 4.5 billion pounds ($7.2 billion), although it was not clear to what extent this cost would hit profits.
The plan could wipe out Centrica's supply profit for two years and knock around a third off its operating profit, according to Liberum Capital utilities analyst Peter Atherton.
In recent years, UK utilities have fared far better on the stock market than their continental peers who have struggled with fast-changing regulation and competition from renewables.
Shares of SSE and Centrica, despite Wednesday's fall, trade around 10-year highs and at around three times their book value, while stocks of European counterparts like E.ON and GDF Suez have spent most of 2013 near all-time lows.
Part of the reason UK utilities do so well is that the energy component in the final retail price, at about 70 percent, is the highest in the EU, regulators agency ACER data shows.
Georg Zachmann at Brussels think-thank Bruegel said energy regulation in Europe is typically used as a tool for social and industrial policy and that priorities differ hugely.
"Some countries favour final customers with low tariffs, like France, some countries favour industrial users, like Germany. Some favour energy companies and the UK might be one example of that," Zachmann said.
But Britain's paradigm of ultra-free energy markets is slowly changing, and the current conservative-led government's electricity market reform, which wants to encourage lower carbon emissions, is seen by many as a first step to re-regulation.
"The inflection point came three years ago when the discussion on the energy market review started," said consulting firm Compass Lexecon's Fabien Roques.
Energy investors were shocked by Labour's announcement, and some compared Miliband's proposals to German Chancellor Angela Merkel's 2011 decision to phase out nuclear power following the Fukushima accident or Russian President Vladimir Putin's plan to order a price freeze on gas and power.
"Fixing the retail prices for consumers while wholesale prices can still move so much makes no sense. We have seen this approach fail disastrously in California," said Phil Hare, a director at Poyry consulting.
The irony of Labour's announcement is that it is likely to cause higher energy prices in the short-term, said Liberum's Atherton, as utilities will go on a buying spree to cover their energy needs for 2015-16. ($1 = 0.6224 British pounds) (Additional reporting by Christine Murray, Sarah Young and Peter Griffiths in London and Geert De Clercq in Paris, writing by Geert De Clercq; Editing by Elaine Hardcastle)
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