Institutions threaten UK energy withdrawal

Several fund managers with large stakes in UK energy companies are threatening to withdraw billions of pounds worth of investment in light of government interference in the market.

With the majority of the UK’s so-called Big Six energy suppliers – British Gas, npower, Scottish Power, SSE, E.ON and EDF – introducing price hikes that outstrip the rate of inflation, the country’s energy firms are being accused of exploiting vulnerable customers in the name of profit.

An ongoing debate has prompted Ed Miliband, leader of the opposition Labour Party, to promise a 20-month freeze on prices should he become prime minister in 2015. Energy companies have responded by claiming their ability to invest in future improvements would be severely hampered by any such action, hamstringing their development and even risking blackouts.

In turn, some institutional investors have privately warned they will cut their exposure to UK energy companies should the government intervene in pricing plans.

In an interview with the Independent newspaper, James Smith of Premier Asset Management, which runs funds with worldwide exposure to utilities, says his firm is considering ‘whether things are going to get worse’ in the UK. If so, he adds, the institution may well reassess its strategy relating to UK investments.

‘It’s right to talk about affordability but it must be done in the right way,’ Smith goes on to say. ‘We can’t view utilities as charities – you won’t find many private companies out there that aren’t looking to charge the most they can on whatever product they make or supply.

‘It is right for regulators to ensure the market is operating in a competitive manner. The alternative to the status quo – nationalization – would be unlikely to reduce prices.’

Chris Murphy, UK equity income manager at Aviva Investors, echoes the notion that ‘profit making is not a bad thing.’ He adds that the cost of switching to renewable energy sources to meet government-enforced quotas is expensive by its nature.

‘Energy companies have to be allowed to make profits to fund the cost of this reinvestment and, naturally, some of these costs will be passed on to the consumer,’ Murphy explains. ‘If energy companies are not allowed to make a profit, there will be underinvestment in alternative energy in the UK and we will have an energy crisis on our hands.’

The warnings come as SSE confirms pre-tax profits of £336.4 mn ($535.5 mn) in the first half of 2013. Though the firm’s retail arm lost money, the company also announced a 3.2 percent rise in interim dividend payments to investors.