Skip to content

SSE dividend ‘precarious’ as market outlook worsens

March 26, 2016

By Paul Homewood

 

image

http://www.telegraph.co.uk/business/2016/03/25/sse-dividend-precarious-as-market-outlook-worsens/

 

The Telegraph reports:

 

SSE could be forced to slash its dividend as the UK’s energy markets continue to struggle this year, experts warned.

The UK’s second largest utility faces further market gloom that will stretch an already strained balance sheet and force the group to revisit its “precarious” dividend policy, top city analysts said.

SSE said earlier this week that it expects profits from its energy retail business to be lower than last year but will still pay out a dividend “at least equal” to inflation, after operating profits from its gas and power business held firm.

But analysts at RBC Capital warned that the healthy showing from SSE’s generation business was “very much a one-off” because the wet and windy winter boosted its renewables output.

In addition, low wholesale electricity prices of £35 a megawatt are putting a further strain on the company, according to sources.

“In the absence of power price recovery, we forecast declining earnings per share, a tight balance sheet and a precarious dividend,” RBC Capital said.

One city source said the group’s investment in around two gigawatts (GW) of renewable energy under a former Government subsidy programme means it is heavily exposed to falling wholesale prices.

SSE’s fleet of onshore wind farms is supported through an older Government scheme which does not set a guaranteed minimum price for the generated power, unlike the new competitive regime. This means that as more renewables join the national grid, the older wind farms become steadily less profitable.

One of the UK’s largest onshore wind generators, chaired by former SSE boss Ian Marchant, has already buckled under the pressure of falling prices. Infinis Energy was taken back into private hands in October after its share price halved within a year.

SSE has already acted by putting in place plans to sell almost half of its holding in a Scottish windfarm for £355m as part of a bid to slash its debt pile by £1bn.

Older thermal power plants are also under pressure, prompting SSE to shut most of its Fiddler’s Ferry coal-fired power plant in April, wiping 1.5GW of power capacity from the UK grid.

“In the meantime, SSE are OK because they’ve got a lot of [price] hedges in place [but] if we’re sitting here this time next year and power prices are still at £35 a megawatt, they will almost certainly have to revisit some of their assumptions – it’s a tough environment, there’s no way around it,” the source said.

According to market data firm Icis, power prices on the Icis Power Index are at their lowest level since March 2010 and are 20pc weaker than this time last year. Wholesale electricity prices are largely set by the UK gas market, which has plunged to near 10-year lows in recent weeks due to the global oil price crash.

ipi-chart-large_trans  kFPTCnqy9aY1-bkqf8SiCZmSkWnuNAJNA_ioJivaVxs

 

A recovery in prices seems unlikely after the UK’s relatively mild winter left gas storage facilities awash with supply, meaning demand for imports over the summer re-fill period will be low. A slow recovery in the price of Brent crude combined with the first flows of US shale into Europe means the cost of gas and power is likely to remain low through 2016.

http://www.telegraph.co.uk/business/2016/03/25/sse-dividend-precarious-as-market-outlook-worsens/

 

This is part of the much wider pattern we are seeing across Europe. What is particularly significant is this comment:

One city source said the group’s investment in around two gigawatts (GW) of renewable energy under a former Government subsidy programme means it is heavily exposed to falling wholesale prices.

SSE’s fleet of onshore wind farms is supported through an older Government scheme which does not set a guaranteed minimum price for the generated power, unlike the new competitive regime. This means that as more renewables join the national grid, the older wind farms become steadily less profitable.

 

Prior to the CfD system starting up, wind and solar farms were subsidised via the Renewable Obligations arrangement, which still left them open to market price volatility.

The CfD process however guarantees a fixed price, whereby the market price is topped up to the strike price. This allows generators to sell at as low a price as they want, and still know they will get their guarantee.

As I have repeatedly warned, this will wreck the market for everybody else, and, as the Telegraph point out, this also includes existing renewable operators, which is rather an irony!

The very real problem for them is that the CfD system has not really left the ground yet. The first auction took place in February 2015, but virtually none of the capacity contracted has actually come on stream yet.

As each year goes by, the cumulative capacity covered by CfD will grow larger and larger, skewing the market more and more.

8 Comments leave one →
  1. A C Osborn permalink
    March 26, 2016 4:11 pm

    Perhaps the latest thinking is to drive them all in to bankruptcy and then help them all out by nationalizing them at very low costs. /sarc off

    • March 26, 2016 4:16 pm

      Those were the tactics of Gordon Browne. It worked with British Energy and nearly worked with Drax.

      • David Richardson permalink
        March 26, 2016 7:43 pm

        Agreed Phillip – There was certainly method in their madness as far as the left are concerned and the last Labour leader almost strayed into admission occasionally – create a problem, blame a bogey man, and then have to step in to sort it out. A few of Miliband’s henchmen couldn’t keep the plan quiet.

        The only weak point of my theory there is that Miliband often gave the distinct impression that he didn’t understand that adding £18bn a year to energy cost would cause any “cost of living crisis”. Was he a good actor or just plain thick??? Answers on a postcard to ………

    • David Richardson permalink
      March 26, 2016 7:48 pm

      Agreed AC as I say below. It was certainly Miliband’s plan but given that Call Me Dave is only fractionally to the right of Milliband – who knows? – Just as long as his father-in-law still gets his benefits handout.

      • David Richardson permalink
        March 26, 2016 7:49 pm

        Actually that should say “Above” not below – old age again.

  2. It doesn't add up... permalink
    March 26, 2016 8:20 pm

    I have been reading the CFD T&Cs again.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/486213/Blackline_-_CfD_Generic_Agreement_-_comparison_against_version_published….pdf

    As far as I can tell, a generator is paid for electricity sent out (less deemed transmission loss) regardless of its deemed (i.e. contractual, as opposed to physical) destination, and the Central CFD Counterparty is kept whole by charging out to “suppliers”. However, were a generator to sell for export via an interconnector the power would be supplied at whatever low market price, while the generator would be compensated for the difference between the appropriate market reference price (either intermittent, or base load) and the inflation adjusted CFD strike price. There may be a difference between sales price and market preference price which might or might not be hedgeable, and might or might not favour the generator. Thus UK consumers would be subsidising cheap exports to e.g. Norway and France. Moreover, the alternative is payment for curtailment. Heads they win, tails we lose.

    I’m not sure that DECC have really thought this through – or indeed whether they are capable of doing so.

  3. Bitter&twisted permalink
    March 27, 2016 2:48 pm

    Pigeons? Roost?

  4. March 29, 2016 3:59 pm

    In the headline the inverted commas should be round ‘market’ as it’s rigged by DECC.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: