By David Ricketts

Of Financial News


U.K. fund managers see the U.K.'s gas crisis as a boon to the largest listed energy companies.

The gas crisis will spark consolidation and lead to more favorable policymaking that will boost their competitiveness, say big shareholders including RWC fund manager Ian Lance, whose holds British Gas parent Centrica PLC across his Enhanced Income and UK Equity Income funds.

Soaring wholesale gas prices, which are up 250% since January, are battering the sector. Seven energy suppliers have gone bust in recent weeks--smaller providers Avro Energy and Green said on Wednesday that they would cease trading. And Bulb, the U.K.'s sixth largest energy supplier with 1.7 million customers, is working with investment bank Lazard to secure funding, according to the Financial Times.

Those losses may be a win for the Goliath players--Centrica shares have surged almost 7% since Monday.

With small energy providers on the brink of collapse, Harrison Williams, an equity research analyst at Quilter Cheviot, said Centrica and E.ON SE are "both positioned well for further market consolidation."

Mr. Lance added: "If the industry consolidates around the remaining six to 10 players, that could also help restore the industry's profitability."

Another U.K. fund manager who holds Centrica stock said the supplier can take advantage of the crisis, given its large number of long-term contracts.

"This provides a degree of resilience to the U.K.'s gas and electricity needs, which up to this point has been underappreciated by policy makers," the fund manager said.

Russ Mould, investment director at AJ Bell, said it is possible that energy suppliers like Centrica and E.On, as well as multi-utility Telecom Plus PLC, emerge the stronger from the current turmoil.

"After all, smaller rivals are folding and less competition can mean more customers, better pricing or both," said Mr. Mould.

"Any consumers whose supplier had gone broke maybe tempted to head for a bigger, branded supplier and Centrica's British Gas brand fits the bill here."

Energy suppliers are unable to pass on the full increase in costs to customers due to the introduction of a price cap by industry regulator Ofgem in 2019, which sets the maximum price suppliers can charge customers per unit of electricity or gas.

Mr. Lance said the crisis shows that the energy price cap was a "poorly thought out policy that was politically motivated."

There are currently around 47 energy suppliers in the U.K., according to online price comparison website The Energy Shop. Less than 10 suppliers might survive, said Mr. Lance.

"To the extent that this forces U.K. government to re-think the price cap, it could be good for the remaining suppliers," said Mr. Lance, who estimates the policy has reduced Centrica's margins in U.K. residential supply from around 7% before the cap was introduced to between 2% to 3%.

The unnamed Centrica shareholder said he expected the U.K. company to take on more books of customers as more smaller rivals collapse but opt for those with "higher lifetime value."

"After a long period of declining customer numbers, it is likely [Centrica will] emerge with its customer numbers building from 7 million to maybe 8 million, and its competitive position enhanced."

"What we are finding in various areas--CO2, gas storage and the like--is that supply chain resilience is an area that has been underappreciated by policymakers," the anonymous shareholder said.

Centrica declined to comment.

British Gas said on Monday that it had agreed to take on customers of People's Energy after the supplier ceased trading. People's Energy had around 350,000 domestic customers and some 500 business clients.

Mr. Williams said there are also signs the industry regulator will "weigh the financial resilience of suppliers in its decisions alongside its desire for competition."

"The gas crisis may also result in the U.K. government tweaking or dropping entirely recent proposals for further increasing competition in the space with the proposals for opt-in switching from 2023 and a trial for opt-out switching to make it easier for consumers to find a cheaper deal," said Mr. Williams.

"Both proposals would have hampered the legacy suppliers, so any changes to the proposals following these market developments could be a positive for these firms in the sector."




(END) Dow Jones Newswires

September 23, 2021 11:06 ET (15:06 GMT)

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