SSE has a problem. As one of the big six power companies that supply the bulk of Britain’s gas and electricity, it’s in a fix.
On one side are wholesale energy prices, which have been on a gallop and now stand about 15% up on a year ago. Tough anti-pollution regulations are adding to the Perth-based power giant’s burden.
On the other side are cash-strapped consumers, who increasingly have politicians and the watchdog on their side. Theresa May turned her fire on energy companies in her party conference speech while earlier this month Ofgem warned the big six not to pass on higher costs.
The regulator has a point: SSE and its peers are far better hedged than many of their smaller rivals. Barclays reckons the big six have to bear only about £10 of extra cost per household from the wholesale spike, versus £142 or more for small suppliers. But those hedges won’t last for ever.
SSE has agreed to freeze prices until April, but I wouldn’t bet on it holding out much beyond then. When one of the big six moves, the others tend to follow. In an era of sharply higher inflation and sluggish wages, those price increases will go down like a lead balloon.
The surge in bond yields on the back of Donald Trump’s election has added to SSE’s lacklustre share price, down about 8% since the autumn, as income-hungry investors switched out of utilities.
Not all beasts are created equal, however, and SSE’s trading update on Tuesday should show more strong trading.
SSE traces its roots back to 1943 and the hydro-electric revolution in the Highlands. It has a rich pile of assets, from 81,000 miles of power cables to North Sea wind farms.
It has shown its willingness to offload these on to a booming market, selling 17% of Scotia gas networks for £621m last year and half its Clyde wind farm for £355m last spring. The market may not appreciate it, but private equity and sovereign wealth funds do.
It may be a corporate pariah, but with a yield of 6%, the pros outweigh the cons. Buy.
