1. The impact of freezing UK energy prices
January 2014
Peter Atherton Research
+44 (0) 20 3100 2088
peter.atherton@liberum.com
Mulu Sun Research
+44 (0) 20 3100 2193
mulu.sun@liberum.com
Ropemaker Place, 25 Ropemaker Street,
London EC2Y 9LY / T: +44 (0)20 3100 2000
www.liberum.com
Liberum Capital Limited is authorised and
regulated by the Financial Conduct Authority.
Registered in England and Wales No. 5912554
This report is prepared solely for the use of Broking Ideas of Liberum

2. The impact of freezing UK energy prices
Background and contents
Labour leader Ed Miliband pledged at the party’s conference on September 24th, 2013 to freeze
UK gas and electricity bills for 20 months if it wins a May 2015 general election. In this
presentation made at a Cornwall Energy conference in London on January 23, 2014, Liberum
Utilities analyst Peter Atherton reviews the impact of that commitment. His colleague Mulu Sun
contributed to the presentation.
Centrica & SSE
MSCI UK Utils vs. Euro ex-UK Utils (five years before Ed Miliband speech)
MSCI UK Utils
MSCI UK Utils - Relative performance since Miliband speech
One-year share price performance before Miliband speech
Share price performance since Miliband speech
Centrica – lost market cap (£m, absolute)
SSE – lost market cap (£m, absolute)
Centrica & SSE – combined lost market cap (£m, absolute)
Centrica & SSE – combined lost market cap (£m, relative to FTSE100)
MSCI UK Utils – lost market cap
Why so damaging?
How will this play out if Labour is ahead in the polls?
The Affordability Crisis
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This report is prepared solely for the use of Broking Ideas of Liberum

3. The impact of freezing UK energy prices
Centrica & SSE
One year relative performance before Labour leader Ed Miliband’s speech on Sept. 24, 2013
110
105
100
95
90
85
Centrica
SSE
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
80
FTSE 100
Source: Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

4. The impact of freezing UK energy prices
Centrica & SSE
Relative performance since Miliband speech
100
90
80
Centrica
SSE
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
70
FTSE100
Source: Bloomberg
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5. The impact of freezing UK energy prices
MSCI UK Utilities vs. Euro, ex-UK, Utilities (five years before speech)
MSCI UK Utilities vs. Euro, ex-UK, Utilities
200
180
160
140
120
100
80
60
40
20
0
Sep-08
Sep-09
Sep-10
MSCI UK Utils
Sep-11
Sep-12
Sep-13
MSCI Euro ex-UK Utils
Source: Liberum, Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

6. The impact of freezing UK energy prices
MSCI UK Utilities index
Relative one- year performance before Miliband’s speech
130
120
110
100
90
80
MSCI UK Utils
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
70
MSCI ex-UK Utils
Source: Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

7. The impact of freezing UK energy prices
MSCI UK Utilities relative performance since speech
MSCI UK Utilities vs. MSCI Euro ex-UK Utilities
100
95
90
85
MSCI UK Utils
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
80
MSCI ex-UK Utils
Source: Bloomberg
7
This report is prepared solely for the use of Broking Ideas of Liberum

8. The impact of freezing UK energy prices
One-year share price performance before Miliband speech
Centrica and SSE versus E.ON and RWE
130
120
110
100
90
80
70
60
Centrica
SSE
E.ON
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
50
RWE
Source: Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

9. The impact of freezing UK energy prices
Share price performance since Miliband speech
Centrica and SSE versus E.ON and RWE
120
115
110
105
100
95
90
85
80
Centrica
SSE
E.ON
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
75
RWE
Source: Bloomberg
9
This report is prepared solely for the use of Broking Ideas of Liberum

10. The impact of freezing UK energy prices
Centrica – lost market cap (£m, absolute)
Centrica - lost market cap
5,000
4,500
4,000
3,500
£m
3,000
2,500
2,000
1,500
1,000
500
0
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Centrica
Source: Bloomberg
10
This report is prepared solely for the use of Broking Ideas of Liberum

11. The impact of freezing UK energy prices
SSE – lost market cap (£m, absolute)
SSE - lost market cap
3,000
2,500
£m
2,000
1,500
1,000
500
0
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
SSE
Source: Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

12. The impact of freezing UK energy prices
Centrica & SSE – combined lost market cap (£m, absolute)
Centrica & SSE - lost market cap
8,000
7,000
6,000
£m
5,000
4,000
3,000
2,000
1,000
0
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Combined
Source: Liberum, Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

13. The impact of freezing UK energy prices
Centrica & SSE – combined lost market cap (£m, relative to FTSE100)
Centrica & SSE – lost market cap
9,000
8,000
7,000
6,000
£m
5,000
4,000
3,000
2,000
1,000
0
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Combined
Source: Liberum, Bloomberg
13
This report is prepared solely for the use of Broking Ideas of Liberum

14. The impact of freezing UK energy prices
MSCI UK Utilities – lost market cap
(£m, relative to MSCI Euro Utilities, ex-UK)
12,000
10,000
£m
8,000
6,000
4,000
2,000
0
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
MSCI UK Utils
Source: Liberum, Bloomberg
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This report is prepared solely for the use of Broking Ideas of Liberum

15. The impact of freezing UK energy prices
Why was the speech so damaging?
• The compact between industry & policy makers has been broken
• Labour effectively wants supply businesses to suck policy-driven cost increases
for two years
• Returns on investment are entirely dependent on public policy – so investors
need to trust politicians
• Specific threat to supply companies…
• …but risk has increased across the sector. Who is next?
• The ‘Everest’ scale of required investment lies ahead, not behind
• The cost of capital must have increased
• Experience from Europe holds few comforts for investors
• Can investors trust politicians to defend both higher prices AND higher profits
that naturally flow from the £200bn+ required investment?
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This report is prepared solely for the use of Broking Ideas of Liberum

16. The impact of freezing UK energy prices
How will this play out if Labour is ahead in the polls?
• Supply companies will seek to reduce their risk exposure to a freeze
• Inevitably they will have to try and fix volumes and price ahead of 2015/16
• This is very likely to push up wholesale gas and power prices…
• ….just as world energy prices could be falling
• Would expose independent suppliers to potentially ruinous risk
• So costs to consumers are very likely to be higher than they otherwise would be
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This report is prepared solely for the use of Broking Ideas of Liberum

17. The impact of freezing UK energy prices
The Affordability Crisis
• UK government policy, with all-party support, is consciously and specifically
designed to increase the unit cost of energy
• Policy makers forecast that unit cost increases will be offset by energy
efficiency gains
• Policy makers expect the world to face rising fossil fuel and/or carbon prices
over the coming decades
• Therefore UK/EU energy policy will, in the long run, deliver lower-cost energy
compared with a fossil-fuel based system
• So policy makers think the affordability crises will resolve itself in the long term.
But…
• …policy makers recognise that costs to consumers may rise during the
transition phase
• Very big risk that assumptions on energy efficiency and world prices prove to be
wrong
• Therefore affordability crises might last a lot longer than expected and/or not
resolve itself in the long term
•
In reality there are only two potential solutions:
a. Rebalance energy policy to reduce cost pressures or…
b. Convince the British public that these costs are a price worth paying
Everything else is kicking the can down the road
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This report is prepared solely for the use of Broking Ideas of Liberum

18. The impact of freezing UK energy prices
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This report is prepared solely for the use of Broking Ideas of Liberum