Capacity market EU ruling pushes SSE to profit warning

Big six energy supplier, SSE, has cut their earnings forecast for the year following the EU’s suspension of state aid for the energy capacity market.

The profit warning came amidst reports that the supplier had lost another 160,000 customers in the final quarter of 2018.Their recent failure to secure a merger deal with npower has left it looking for other options for disposal of its energy unit too.

In the announcement, SSE said that their earnings per share should be expected at around 64 – 69p to the end of the financial year. This was in contrast to their previously estimated earnings of 70 - 75p.

They lay the blame for the profit warning squarely at the feet of the European Court of Justice, claiming that the withdrawal of the Capacity Market has seen them miss out on £60m of income. Their statement said:

'SSE's working assumption is that it will not be able to recognise the remaining 60 million income derived from the capacity market for 2018/19 in the current financial year,'

The group is currently undergoing a major shakeup, as they look to separate their  energy supply business from their core group. If they are unable to sell it off, they have said they may ‘retain Energy Services as a separate, ring fenced business within the SSE group’.

They are also looking to offload other parts of the business. Last year, they sold off their stake in a pair of Scottish wind farms for £635m, and half of their telecoms network for £380m.

As well as the bump in the road caused by the loss of the Capacity Market, SSE have been struggling due to increased competition and the introduction of the energy price cap .

The landmark ruling on the UK’s Capacity Market came towards the close of last year, as cleantech firm Tempus Energy brought a legal challenge to the European Courts of Justice (ECJ).

The Capacity Market saw state money being used to keep the lights on. Generators could bid for contracts to provide backup power during peak demand over the winter, and each year up to £2.6bn of public money has been paid out to coal, gas and diesel plants as well as some battery storage and Demand Side Response (DSR) projects.

However, DSR and battery storage developers have long argued that the way the market is run means it’s harder for them to compete with established fossil fuel generators. Tempus Energy are a software company who support DSR, and said the system was biased towards fossil fuels .

EU State Aid rules say that governments are required to consider alternative ways of meeting demand before any polluting generators are subsidised. Rules also state that capacity boosting measures should provide incentives to those who operate clean technology.

Following a four-year long court battle, the ECJ finally concluded that the UK was in breach of these rules. As a result, the Capacity Market faced immediate suspension until a full investigation could take place. Current Capacity Market auctions were due to take place in January and February but have not gone ahead this year.

The European Commission has already said they plan to contest the ECJ ruling. Just last week, they announced that they will begin their probe into the Capacity Market imminently. While this is little comfort to generators who have missed out on this round of funding but is, at least, a light at the end of the tunnel for those reliant on state aid.

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