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Chart of the Week | Bulls and Bears – What has been the market’s reaction to the price cap proposal?

This week Prime Minister Theresa May confirmed that the upcoming Conservative manifesto would include a pledge to put a price cap on domestic energy bills. We will need to await publication of the manifesto for the detail of how this might be implemented, but from the public comments so far it appears likely that their proposal will be similar to that made by the Competition and Markets Authority in its initial inquiry report; namely a cap on the level of standard variable tariff (SVT) to set by Ofgem. The CMA then proposed a single tariff cap for the sector, calculated on what “reasonable” costs a model supplier would incur plus a modest margin. Clearly, with ~75% of the customers of the Big Six suppliers currently on SVTs this proposal would present a considerable risk to the profitability of suppliers. The share price reaction of the two listed major suppliers SSE and Centrica has been fairly muted so far. Since 1 May SSE's shares are actually up 2.8% whilst Centrica's share price is down a modest 3%.   So given the threat to profitability why the modest share price reaction? The most likely answer is that the threat of intervention was already priced in. May has spoken several times on this issue since becoming Prime Minister and had made it clear that she favoured intervention in the market. This has weighed on share prices, with both SSE and Centrica trading at close to six month lows. In that time SSE has underperformed the ...

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