Waiting for decarbon plan to be revived
SSE cuts earnings forecast after ruling on green subsidy
The scheme was designed to tackle carbon emissions (pic: SSE)
Energy giant SSE has downgraded its annual earnings forecast following a European court ruling against UK government support for decarbonising electricity supplies.
It said the UK government regarded the ruling against the Capacity Market Scheme as only a delay and that it expects payments to resume.
In the meantime, adjusted earnings per share for the year to March is expected to fall 6% to between 64p and 69p against previous guidance for adjusted EPS of 70p and 75p.
SSE noted that a judgement on 15 November in the European Court of Justice had the effect of removing the European Commission’s state aid approval of the GB Capacity Market scheme. This is the main government policy designed to decarbonise UK electricity supplies while maintaining security of supply and minimising costs. Almost £6 billion of capacity contracts have been handed out, mainly to old coal, gas and nuclear plants.
The market was approved in 2014 by the European Commission, which said it complied with rules on state aid However, in November the General Court of the EU annulled this approval and said the commission should have opened a more detailed formal investigation into the market design.
Since the ruling, the capacity market has been put on hold which means that no payments will be made to power firms, including under contracts over this winter worth around £1bn. It also means the next capacity auctions are indefinitely postponed. They were due to be held in January.
In its trading update today, SSE said: “The UK government continues to believe that the capacity market is the right mechanism for delivering security of supply at the lowest cost to consumers and stated in February 2019 that it intends to ‘ensure that suspended payments are made to holders of capacity market agreements for 2018/19. This should make this income recognition issue a matter of timing only.’ ”
SSE added that its actual adjusted EPS for the year would ‘continue to be influenced by the range of factors’ set out at the start of the financial year.
The company also said it was committed to its dividend policy and will use £200m of the proceeds of recent asset sales to buy back shares, using the remainder to pay down debt. It lost 160,000 domestic energy customers in the last quarter of 2018.
SSE Energy Services facing options
SSE said it is continuing to look at options for its Energy Services business which was withdrawn from a merger with Npower last year. It may choose to retain the business.
It is expected to be profitable and cash flow positive (excluding working capital movements) in 2018/19 and 2019/20.
SSE believes that SSE Energy Services will be best positioned to build on this strong performance in a future outside of the SSE group. With that in mind, SSE is continuing to build on the significant work done to date to separate SSE Energy Services as an independent, self-sufficient entity within the group, in preparation for its future outside it.
Future options are now being assessed for SSE Energy Services. These include: a standalone demerger and listing on either the premium or the standard listing segment of the Official List; a sale; or an alternative transaction.
“If none of the other options is viable SSE may retain Energy Services as a separate, ring-fenced business within the SSE group that would be expected to be cash flow positive.
“These options are being assessed, taking into consideration the best interests of customers, employees and shareholders, and with the support of external advisers. SSE will provide a further update on the progress of its assessment of the options by the end of March.”
Alistair Phillips-Davies, chief executive of SSE, said: “We continue to make good progress in our core businesses of regulated energy networks and renewable energy, complemented by flexible thermal generation and business energy sales.
“We have also demonstrated our ability to create value for shareholders through the recent sales of stakes in our telecoms business and selected onshore wind farms with expected proceeds of over £1bn. We are also making progress in assessing the options for the future of the Energy Services business.
“SSE has a clear strategy and good long-term prospects for its high-quality core businesses and assets that contribute to the transition to a low carbon economy and will support the creation of value and delivery of our dividend plan in the years to come.”
Russ Mould, investment director at AJ Bell: “The utilities sector was supposed to be a safe, boring part of the market to invest in, offering a predictable stream of income from regulated returns and limited share price volatility.
“Not any longer it seems, with SSE the latest name in the space to undermine this image. Political pressure has been a big factor in the industry’s more chequered recent history
“Topically, given the current focus on Brexit, it is an EU court ruling which lies behind today’s profit warning from the company.
“A Government scheme paying the likes of SSE to provide back up during periods of high demand basically ruled to be state aid.
“The firm also faces the question of what to do next with its energy services business after the failed merger of its consumer-focused arm with npower.
“The established UK energy providers have faced two challenges, with easier switching leading to a competitive threat from smaller challengers and an energy price cap putting margins under severe pressure.
“Investors will be awaiting a promised update before the end of March eagerly so the company can focus on regulated networks and renewables where it sees greater potential.”
Donald Brown, senior investment manager at Brewin Dolphin Scotland: “There’s a lot to be taken from SSE’s latest update. The future of SSE Energy Services remains unclear, but options include demerging and listing the business, a sale, or an alternative transaction.
“However, it’s difficult to see who might be interested in buying the business, which has been in decline for some time. Ofgem’s decision to increase the price cap could also push up energy bills for consumers which won’t be good news for a large incumbent like SSE, despite the well-documented challenges that have forced some of its smaller rivals to fold in recent months.
“While SSE expects to take a hit on earnings per share, meaning a sharp fall in expected earnings only three months after its previous forecast, the company’s £200m share buyback scheme will be good news for shareholders if it provides share-price support.
“Meantime, there will be relief at the commitment to the 97.5p per share final dividend.”