4.1 Reasons For Investors To Steer Clear Of Centrica PLC And SSE PLC

Today I am looking at the intensifying revenues pressures hitting earnings at Centrica (LSE: CNA) and SSE (LSE: SSE).

Tariff cuts heating up

In line with rising calls to pass collapsing wholesale costs onto their customers, the country’s major energy providers have been busy over the past few weeks to cut their tariffs. E.on got the ball rolling with a 3.5% gas tariff cut just over a fortnight ago, forcing SSE to cut its own prices just this week by 4.1% and pledging not to lift electricity or gas prices again until July 2016.

Centrica has also been forced to get in on the act and cut its own gas tariffs by an even more severe 5% just prior to SSE’s move. EDF Energy is the only one of the so-called ‘Big Six’ suppliers still to take the hatchet to its charges.

Customer numbers keep on tumbling

SSE’s decision this week once again highlights the mounting competitive pressures in the UK power sector, exacerbated by the rising role of smaller power suppliers in the British energy space.

Centrica has seen its British Gas residential customer base relentlessly shrink for some time now, and business held just over 15 million accounts as of November’s interims, down from 15.3 million at the end of 2013 and a stark drop from the 15.6 million accounts recorded at the close of 2012.

Rival SSE also continues to haemorrhage customers, and this month’s trading update revealed that the number of electricity and gas accounts on its books in Britain and the UK stood at 8.71 million as of the end of 2014, down from 9.1 million as of March 2013.

Pressure continues to mount

But this month’s reductions may not be the end of the matter, with many critics arguing that the cuts are not anywhere close to matching the decline seen in wholesale fossil fuel costs in recent months.

SSE has tried to dampen the argument by commenting that “there are significant other costs within energy bills, including those relating to government-sponsored environmental and social policies and the roll-out of smart meters,” downplaying claims that tariffs should be sliced even further — the business argues that wholesale costs account for less than half of the typical household bill.

But such rhetoric is clearly not washing with regulators, consumer groups or politicians, and Chancellor George Osborne urged suppliers in his Autumn Statement to pay greater attention to passing on falling fuel prices to customers.

And the situation could get a lot worse for Centrica and SSE, who are already being investigated by the Competition and Markets Authority over their profitability, should Labour secure May’s general election and follow through on its pledge to freeze energy prices for 20 months. I believe that Britain’s major energy suppliers should be braced for prolonged revenues pain as the trading environment becomes more and more challenging.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.