Labour could have to pay up to £160 billion to renationalise the utilities, according to a new rating agency report.
In a study on the political risks weighing on UK utility ratings, Standard and Poor (S&P) has estimated that the upfront costs associated of implementing Labour’s public ownership policy is between £140 billion and £160 billion.
This figure is based on the regulated asset value (RAV) of the privatised energy and water companies.
Water companies (£70 billion) represent the biggest chunk of the potential renationalisation bill. The remaining costs are split between the gas and electricity distribution (£55 billion) and transmission companies (£20 billion).
These costs could be “significantly higher” if Labour attempts to nationalise additional sectors, the report warns.
And the high premium prices of up to 50 per cent above the RAV, achieved in recent sales of UK regulated utilities, could also push the upfront costs of renationalisation “significantly higher” for the country, S&P says.
The report assesses the potential renationalisation of utilities under a Labour government as “a remote possibility”.
But it says Labour’s proposal to bring key utilities back into public ownership is the “clearest illustration” of the increased political scrutiny which could weigh down on ratings of UK utilities.
“Regulatory reset risk is increasing for water companies as the review process for the next regulatory period nears conclusion. For energy supply companies, the introduction of a tariff cap has undermined business prospects and added pressure on the ratings on the two largest players, Centrica and SSE,” the report highlights.
The water sector faces the most immediate threat in terms of a rating downgrade due to the new pricing methodology being introduced by Ofwat.
Around a fifth of UK utilities have a negative ratings outlook compared with a tenth of their counterparts in Europe, the Middle East and Asia, according to the report.
It states: “Overt political pressure could reduce the regulators’ independence. Furthermore, we believe that persistent political pressure undermines the predictability and the financial attractiveness of the sector to investors.”
However the report says political pressure could improve utilities’ operating performance and profitability by fostering leaner operations and greater efficiency.
S&P has increased the chances of a “no deal” Brexit to a “relevant rating consideration” although it is still not the agency’s base case scenario.
Matan Benjamin, global ratings analyst at S&P, said: “Generally speaking, we do not expect the immediate implications of Brexit to be material for the stand-alone credit quality of rated utilities.
“Their business operations largely take place in the UK, with limited cross-country transactions, and several utilities benefit from local monopoly positions. That said, a scenario in which the UK leaves the EU without a deal could lead to a prolonged period of market volatility, with reduced market liquidity and increasing regional risk.”
In this scenario, according to S&P utilities are likely to face higher funding costs and loss of access to relatively cheap European Investment Bank loans.
S&P continues to assess the UK country risk as low with the rated water, electricity, and gas companies benefiting from “one of the best regulatory frameworks” in Europe.