More than 1,700 UK energy firms face "significant" financial stress ahead of a potentially costly price cap

 
Courtney Goldsmith
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The energy sector is in a weak position ahead of a potential £1.7bn a year hit (Source: Getty)

Red flags are flying over the energy sector after research found more than 1,700 UK gas and electricity firms are in a weak position ahead of a potential energy price cap that could cost companies billions a year.

For the first quarter of 2017, research by insolvency firm Begbies Traynor found the number of utilities facing "significant" financial distress increased 29 per cent compared with the same period the previous year.

The research follows the Conservative party's promise to put a cap on energy prices, which they said will cut costs by as much as £100 per year for the 17m households on standard variable tariffs. However, the move could end up costing energy suppliers an additional £1.7bn a year, and many aren't well placed to take the hit.

Influential ratings agency Moody's said the cap would severely damage some of the biggest energy suppliers. The plan will likely "push the industry to losses and significantly reduce key credit metrics" for firms such as Centrica, owner of British Gas, and SSE.

The two firms are most exposed because of the high proportion of their customers currently on standard tariffs, Moody's said.

According to Begbies' red flag alert, a benchmark of corporate financial distress, 1,706 firms were under high levels of stress in the first quarter of 2017. In the past three months alone, the levels of "significant" distress among the sector's businesses has increased by 15 per cent.

Unseasonably warm weather over the winter is partly to blame for the sector's weakness as energy firms saw lower than expected energy consumption.

Earlier this week, Centrica, the owner of British Gas, said warmer weather in the UK hit its first quarter finances.

"Unfortunately, with the impending election and the reignited political debate around energy tariffs hitting the headlines, the outlook for the UK energy sector looks anything but bright," said Julie Palmer, partner at Begbies Traynor.

Energy firms have come under fire as bills doubled over the past decade to an average of around £1,200, but many argue Prime Minister Theresa May's energy price cap is not the right way to tackle out of control bills.

"As ever the devil is in the detail and we will have to wait and see exactly how the government’s suggested cap on individual standard variable tariffs will impact energy companies," Palmer said.

Although the Big Six suppliers are likely to take the biggest hit, Palmer's concern is that many of the UK's smallest providers could be pushed over the edge, hurting competition in the long run, "which would be counterproductive for both suppliers and customers alike".

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