The recent merger between energy firms SSE and Npower is being renegotiated in light of the upcoming energy tariff price cap.
SSE and Npower are committed to merging their businesses in order to “create the UK’s second-biggest energy company”. However, with recent developments in the energy sector, especially the introduction of the energy price cap, the merger requires further negotiations.
The energy price cap, which will come into effect in 2019, will force energy providers to lower their default tariffs, with customers paying an average yearly cost of £1,137. Ofgem will reassess the cap every six months and evaluate whether the cost should be increased or maintained. The cap will be in place until 2020, and afterward can be extended until 2023. Currently over half the households in the UK are on expensive standard variable energy tariffs.
SSE voiced concerns that the price cap would result in “‘significantly lower’ profits than it had expected at the start of the financial year in its retail arm”. Therefore, further discussion is needed to reassess the commercial terms associated with the merger. It is expected that there will be an update on the merger in mid-December.
SSE’s shares fell by 4% on Friday “when the market got its first chance to respond”. The company also released a profit warning in September “saying earnings at its household supply business will be significantly lower if Ogem’s cap is implemented”. However, the government has consistently put pressure on the energy industry to “scrap the controversial standard variable tariffs” and the Prime Minister described the tariffs as a “rip-off” earlier this year.
Alistair Philips-Davies, SSE chief executive, said: “We continue to believe that creating a new, independent energy supplier has the potential to deliver real benefits for customers and the market as a whole, and that remains our objective.
“In assessing potential changes to the commercial terms of the proposed SSE Energy Services/npower combination, the interests of customers, employees and shareholders will be paramount.”
The merger was initially supposed to be finalized in the first quarter of 2019. However, both companies believe it will not occur until much later. Previously, SSE was “expected to hold 65.6% of stock on the new company” which is to be listed on the London Stock Exchange. SSE has explained that the energy price cap has the potential to affect the new company’s “requirements to post collateral against its credit exposure and its ability to obtain and retain an appropriate credit rating”.
Innogy, the German company that owns Npower, released a statement, saying: “Adverse developments in the UK retail market and regulatory interventions such as the price cap have had a significant impact on the outlook for the combined retail company”.
Both companies are still positive about the merger and believe it could “deliver real benefits for customers and the market in general”.
