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How Centrica became a riskier bet


CPP Group sold card protection on behalf of lenders including HSBC and Royal Bank of Scotland

CPP Group sold card protection on behalf of lenders including HSBC and Royal Bank of Scotland

CPP Group sold card protection on behalf of lenders including HSBC and Royal Bank of Scotland

It was once seen as a safe haven for investors amid the turmoil of the financial crisis, but a decisive change in the political landscape means British Gas owner Centrica is now looking a riskier bet in the City.

Despite the public outcry about household gas and electricity bills, shareholders were until a few months ago kept happy by a steady flow of profits and dividends.

The domestic energy business, serving two fifths of the UK gas market, was raking in big earnings, especially after a big freeze at the start of 2013 forced customers to turn up the thermostats.

Centrica made so much money from households that it announced last spring that it would put a lid on further price rises for the time being.

But the largesse was short-lived, with a 9.2% average increase on dual fuel bills announced in the autumn, echoing similar large hikes from rivals.

However, politicians had begun to sense that the public was losing patience.

In September, Labour leader Ed Miliband told his party's conference that energy prices would be kept on hold for 20 months should they win power.

The speech marked the start of a downward drift in Centrica shares that has seen around a fifth knocked off the FTSE 100 group's value.

It was not just the fear of what might happen should Labour win that has shaken investors, but the subsequent political attention that has been focused on the issue of household bills and the regulation of the whole sector.

Centrica has other businesses including energy production and storage as well as international operations but with its British Gas arm serving 12 million homes in Britain, analysts fear it has much to lose from major changes in pricing and regulation.

Like other suppliers, it has blamed price hikes on a combination of rising wholesale energy costs, higher network charges for delivering power, and so-called green levies imposed by the Government to pay for energy efficiency initiatives.

When ministers announced a shake-up of the levies, it passed on the savings in the shape of a tariff cut, effectively reducing the level of the increase a few months before.

But the political climate continued to weigh on the sector and it was British Gas in particular that came into focus this month with a fresh intervention from Energy Secretary Ed Davey.

Mr Davey urged competition authorities to "think radically" as they consider whether to launch a full-scale investigation into the energy market that could see then former nationalised monopoly broken up.

In a letter to the regulators, he highlighted the company's dominance in the gas supply market, and figures showing its profit margins for gas were several times higher than they were for electricity. He said consumers could save £40 a year if they were aligned.

Elsewhere, investor mood was dampened in November by a warning that the group's annual earnings were likely to remain flat at £2.7 billion - rather than rising by 3-4% - amid challenging conditions for its business supply arm in the UK and US.

More recently, shares came under pressure after a ratings downgrade to "sell" from UBS, citing a likely cut in British Gas profit margins "to reduce political risks", as well as further threats from Labour's freeze and possible caps on margins and market share.

Analyst Stephen Hunt said there would be little consumer benefit from such interventions and that they could have a negative impact on security of supply as well as investment.

"However, ahead of the 2015 election, these concerns may not stop political parties proposing and (potentially) pursuing such policies."

Michael Hewson, chief market analyst at CMC Markets UK, said the climate had changed from a few years ago when banks were caught in a "maelstrom of volatility" amid the financial crisis.

Share prices of energy companies such as Centrica had provided "relative havens of tranquillity, with the added comfort of a fairly decent dividend in a period of rock bottom interest rates".

"The political climate has changed somewhat since then and the power companies have now become subject to intense scrutiny over how they set energy prices at a time when wage growth has been lagging well below inflation.

"Last year's intervention by Labour leader Ed Miliband to promise to cap energy prices was the opening salvo which helped torpedo the share prices of energy companies in the last six months with Centrica's share price dropping almost 20% since its September highs.

"Not only that, the companies are also having to cope with falling consumption, at a time when consumers are becoming much more energy aware and energy efficient, while the fairly mild winter temperature wise has also seen demand fall relative to the cold temperatures seen last year."