SSE and Centrica hit as Reeves threatens to rewire energy pricing

SSE and Centrica hit as Reeves threatens to rewire energy pricing Proactive uses images sourced from Shutterstock

Shares in SSE PLC (LSE:SSE) and Centrica PLC (LSE:CNA) took a heavy beating on Friday after Chancellor Rachel Reeves signalled that the government is actively working to sever the link between electricity and gas prices – a reform that could fundamentally reshape the economics of the UK energy sector.

SSE fell 5.2% and Centrica dropped 4.9%, making the two utilities among the biggest fallers on the FTSE 100 on a day when the broader mood across European markets was broadly positive, buoyed by hopes of progress in Middle East peace talks.

The sell-off was triggered by comments Reeves made in Washington, where she confirmed that she and Energy Secretary Ed Miliband were working on a “practical way” to delink electricity and gas prices. Under the UK’s current marginal cost pricing model, gas-fired power stations typically set the wholesale price of electricity for the entire market. The result is that when gas prices rise, consumers pay more across the board – even for electricity generated from wind, solar or nuclear, where production costs are largely unaffected by gas market movements.

Reeves described the proposed reform as “quite a big change” but insisted it was “absolutely the right thing to do,” particularly as electricity makes up an increasingly large share of the UK’s overall energy mix. She suggested further details could emerge within days or weeks.

Both SSE and Centrica have benefited from the existing pricing structure during periods of elevated gas prices, and any move to decouple the two could compress margins and reduce revenue predictability.

“Whilst the mood seems broadly risk-on on hopes for peace early Friday, with European markets broadly higher and US futures higher, the FTSE 100 dipped as utilities were hit by comments from Chancellor Rachel Reeves about decoupling energy pricing from gas prices,” commented Saxo UK investor strategist Neil Wilson. “Centrica and SSE almost 5% lower each after she said the UK government would look at ending the marginal pricing system that creates higher energy bills for customers than in other countries.”