September 6, 2018 / 3:10 PM / 16 days ago

Breakingviews - UK power price caps will give banks jitters

LONDON (Reuters Breakingviews) - Britain has taken the plunge. UK energy regulator Ofgem on Thursday outlined how it intends to cap energy consumers’ bills, after both main political parties advocated upper limits on what households pay. The whiff of interventionism warrants nervousness in domestic banks’ boardrooms.

A gas cooker is seen in Boroughbridge, northern England in this November 13, 2012 file photograph. REUTERS/Nigel Roddis

Two-thirds of households pay so-called standard variable tariffs, the default rate, and could have saved 1.3 billion pounds in 2017 had Ofgem’s new 1,136 pound cap on gas and electricity bills been in place. But while every price hike by energy companies is met with outrage, UK consumers in the first half of 2017 paid one of the lowest rates in western Europe per unit of energy consumed after adjusting for purchasing power, according to Eurostat.

Ofgem can tweak the cap every six months to cope with fluctuating wholesale energy costs, which along with network expenses constitute almost 60 percent of supplier costs. Its proposals could also have been more painful. The new ceiling was higher than analysts had expected. And Centrica, whose British Gas division is the UK’s biggest energy provider, had already said it could live with a 100 pound hit to its standard variable tariff, against the 70 pound drop that transpired. As a result, the company’s shares jumped 5 percent.

Still, Centrica faces a 210 million pound hit, Jefferies analysts estimate. The top six energy providers and their investors will also have to get used to Ofgem’s 1.9 percent operating profit margin cap. That compares with the 4.5 percent margin that the six on average recorded in 2016. Outsourcing a key part of strategy to the state is a huge constraint on corporate flexibility.

On the face of it, the Financial Conduct Authority is some way from copying Ofgem. But in July it estimated that 800,000 British mortgage payers could on average save 1,000 pounds a year if they were more active in finding an alternative to the banking equivalent of default tariffs. That’s more than 13 times what households are expected to save because of Ofgem’s utility proposal. Market leader Lloyds Banking Group has 40 percent of its mortgage book on such rates, generating 1.3 billion pounds in “excessive” net interest income, KBW analysts estimate.

Making money off customers who are too apathetic to switch used to be seen as perfectly reasonable. The clampdown on utilities gives companies in other sectors good reason to watch their own backs.

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