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Centrica seeks legal challenge to UK energy price cap over wholesale costs

Centrica PLC, the U.K. utility that owns the country's largest electricity and gas supplier, British Gas PLC, is launching a legal challenge against a looming household price cap that will squeeze profits for British energy companies in 2019.

The company, which also supplies customers in North America through subsidiary Direct Energy LP, said Dec. 20 that it would seek a judicial review against the cap on retail tariffs the Office of Gas and Electricity Markets, or Ofgem, will implement from the start of 2019, arguing that the regulator's assessment of wholesale energy prices in setting the limit was unfair.

Centrica warned in November that the price cap, which will limit the bill for a typical dual-fuel customer to £1,137 per year, would cut its adjusted operating profit by approximately £70 million in the first quarter of 2019. British Gas holds a market share of approximately 30% and 20% of the U.K. gas and electricity markets, respectively.

The company is taking issue with Ofgem's decision to adjust the original six-month reference period for monitoring wholesale prices that it had said would form the basis for the final level of the cap during the first quarter of 2019. Ofgem's decision to move the reference period two months earlier, when wholesale prices were lower, came in between two consultations on its proposed methodology and tightened the cap after suppliers had already signed contracts on the assumption of a higher price basis, Centrica said in a legal opinion submitted to Ofgem in October.

Centrica said in a statement that it had no intention to delay the cap's implementation from the start of January and did not expect it to be deferred.

"As we have previously said, we do not believe that a price cap will benefit customers but we want to ensure that there is a transparent and rigorous regulatory process to deliver a price cap that allows suppliers, as a minimum, to continue to operate to meet the requirements of all customers," the company said.

The cap applies to the most expensive standard variable tariffs and will be £68 lower than the current corresponding British Gas contract, according to Centrica. It expects lower bills for up to 3.5 million of its customers as a result.

A spokesman for Ofgem said the regulator would defend its proposals "robustly" in the event of a judicial review. "Ofgem carried out an extensive consultation process when setting the price cap and we believe that it offers consumers on poor value tariffs a fairer deal."

Ofgem will update the level of the cap for the first time in April 2019, particularly if wholesale gas and electricity prices keep rising. Several of Britain's largest suppliers have hiked their standard tariffs repeatedly this year, and several smaller companies have gone bust amid increasing wholesale costs.

"The price cap will ensure that whether energy costs rise or fall, suppliers are not feathering their nest," Ofgem CEO Dermot Nolan said when the final level of the cap was announced in early November.

An initial hearing on the case could take place before the Administrative Court, a division of the High Court of Justice, in January 2019, and the total review is expected to last up to nine months. If a judge finds in favor of Centrica, it could ask Ofgem to suggest a suitable remedy to make up for the higher impact for suppliers during the cap's transitional implementation in the first quarter of 2019.