Shares, including Infinis, SSE and the wider UK equity market, rose last Friday as the risk of Scottish independence was removed. However, the end of the independence debate may simply mark the beginning of political campaigning for the May 2015 general election, and a discussion of further devolution of powers from Westminster. Low-risk returns are worth a great deal to investors in the current low interest rate world, but UK energy policy risks have not been eliminated completely.
While investors expected a No vote, there was still a worry about the potential downside in the event of a Yes. Over and above currency and credit rating concerns, many energy-specific issues might have been considered to be at risk, including renewable subsidies (largely backed by English customers), market wholesale prices, retail margins and even network regulation. A downside scenario might have cost Infinis and SSE 20 per cent of their group earnings.
S0 the United Kingdom will now stay united, but energy policy is still a divisive topic. Energy regulation is an area reserved for Westminster rather than the Scottish parliament, but Northern Ireland has a different energy regulator to Britain and it is possible this could be an area of competence demanded by Scotland. Retailers might be nervous about the implications, while network companies would also be likely to want to retain current arrangements, even if a new Scottish energy regulator promised to be “fair”. The existing Renewables Obligation Certificates look likely to continue to be traded on a national basis, but Scotland may want more control over awarding future contracts for difference for clean generation. Taxation of carbon emissions for generators is already different in Northern Ireland, and a different Scottish carbon price might be possible, if not sensible.
At a UK level, since Labour leader Ed Miliband’s price freeze promise in September 2013, energy has been a key political issue and is likely to remain so through to the general election in May 2015. Labour is currently leading in most national polls and has promised to abolish Ofgem if elected, creating a tougher regulator with a mandate to penalise perceived poor performance. The political reaction to the results of the current Competition and Markets Authority inquiry into energy supply is also likely to be important to future sector returns.
While global equity investors want UK utilities to look as much like bonds as possible, political noises around energy policy will not be banished by the No vote.
Martin Brough, utilities equity analyst, Deutsche Bank