Politicisation of energy market spells trouble for SSE says JP Morgan

JP Morgan has warned that the politicisation of the UK energy market could lead credit ratings agencies to downgrade energy firm SSE. The recent announcement that the company would raise prices by 8.2 per cent, adding £104 to the average annual bill, led to a series of condemnations by senior Labour politicians. SSE asserted that government policy had been a significant factor in the price rise. The cost of the company's green obligation has risen 13 per cent in the last year while its wholesale energy prices have risen only four per cent.

Ed Miliband's announcement that he intends to freeze energy prices should Labour win the next election has led to growing uncertainty in the energy sector. Supply companies stand to lose up to £4.5bn should the policy be implemented, while the UK gas and electricity sector has already lost 5.4 per cent of its value in stock prices. Arguments about the potential damage to the sector have found little resonance with the public, with 63 per cent agreeing with Ed Miliband's price freeze policy a in recent YouGov poll.

JP Morgan warned that political interference in the energy market in other countries has meant bad news for shareholders. Increasing pressure from the opposition and the public will most likely lead to the government taking action to reduce energy prices in the short term. JP Morgan expects this to take the form of cuts in green subsidies and an extension of the compliance period for the Energy Company Obligation. Another possibility may be to flatten the increase in the carbon floor price.

Credit ratings agencies, Moody's and S&P, have both commented on the increasing business risk for UK utilities due to the political climate. SSE's credit metrics are already borderline A-/A3 and if the political environment continues to deteriorate SSE could face a serious chance of a downgrade.