Sembcorp Industries - Energy bill cap expected to have subdued impact
15 Sep 2022- The UK’s new leader, Liz Truss, has capped consumer energy bills at £2,500 (S$4,081) for two years to cushion rising energy prices. The price cap imposed, limits the amount energy suppliers can charge for its tariffs.
- Impact on SCI expected to be subdued as the price cap will be funded by the UK government. The UK is also not a significant contributor to its overall portfolio of energy assets.
- Review of the UK’s net zero strategy is underway, which could slow move to renewables. Liz Truss has announced dozens of new North Sea licenses in an effort to boost domestic oil and gas production.
- We maintain ACCUMULATE with unchanged target price of $3.68. Our earnings and call is unchanged while our target price is maintained at $3.68, still based on 1.2x P/BV, the average of its peers.
The news
The UK’s new leader, Liz Truss, has capped consumer energy bills at £2,500 (S$4,081) for two years to cushion rising energy prices. For businesses and public sector bodies, a sixth-month scheme will offer equivalent support to that for households, with a review in three months about how it could be better targeted.
SCI has 1.3GW of energy assets in the UK, consisting of energy generation and battery storage. The UK is not a significant contributor to its overall portfolio of energy assets, which are concentrated in South-east Asia, China and India.
The Positives
+ Impact on SCI expected to be subdued as cap will be funded by UK government. SCI’s contract with the national grid of the UK means that it generates electricity through a portfolio of diesel and gas generators. The price cap imposed, limits the amount that it can charge for its tariffs. The difference between the power in the wholesale markets, and the capped consumer price, however, is expected to be borne by the UK government.
+ Energy bill cap will not be financed by energy suppliers. Despite calls by the opposition Labour Party to partly fund the scheme by a windfall tax on energy suppliers, PM Liz Truss has ruled this out, favouring the entire bailout to be funded through more government borrowings instead.
The Negatives
– Review of the UK’s net zero strategy underway; could slow move to renewables. Liz Truss has announced a review of the government’s net zero strategy, which she argued is necessary under the current landscape. The review could potentially impact demand for energy storage, though this is still uncertain at this stage. Liz Truss has announced schemes she said would increase energy resilience, including launching about 100 new oil and gas licenses along with dozens of new North Sea licenses in an effort to boost domestic oil and gas production.
In the last 10 years, the UK has made significant progress to decarbonise its power sector (Figure 1). It has grown its renewable share of electricity generation from 7% to 43%. This has led to increased demand for energy storage, in which SCI is operating one of the largest energy storage portfolios in the UK at 120MWh.
Outlook
The impact of UK PM Liz Truss’ moves on the energy sector are still uncertain at the moment as the finer details are lacking. The impact on SCI is expected to be subdued as the contribution from UK is not large. That said, we are monitoring the developments, and will provide an update when more details are available.
SCI is currently in the midst of building a 360MW energy storage system at Wilton International on Teesside, which will help the UK achieve its net zero target.
About the author
Terence Chua
Senior Research Analyst
Phillip Securities Research
Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.
He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.
About the author
Terence Chua
Senior Research Analyst
Phillip Securities Research
Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.
He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.
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