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Yet Another Reason To Cast Centrica PLC And SSE PLC Adrift

Not surprisingly shares across the UK energy sector received a boost following last month’s general election. With the charge of the Labour Party now consigned to history — and with it Ed Miliband’s promise to get tough on profits at the ‘Big Six’ suppliers — both Centrica (LSE: CNA) and SSE (LSE: SSE) have seen their stock rise 5% in little over a month.

But prices have moderated more recently, and with good reason in my opinion. The Conservatives’ promise to look after ‘hard-working families’ has seen the new goverment waste no time in questioning the profitability of the power sector.

Indeed, new energy secretary Amber Rudd has already written to the country’s major players, appealing for further considerations on charges. 

Rudd told the Daily Mail this week that: “Labour’s price freeze was a theme for why [suppliers] were unable to reduce prices before the election. Now that threat is no longer there, I intend to keep up the pressure on them to act.

And the energy secretary added “My focus is to get the best deal for consumers and the department is working hard to keep energy bills as low as possible.

Are fingers about to get burnt?

This news followed regulator Ofgem’s latest report in April, which found that electricity providers could increase their profit margins to up to £120 over the next 12 months for dual-fuel consumers. This is despite wholesale gas and electricity prices collapsing from levels seen last year, and these costs accounting for just 42% of the average household bill.

The UK’s major utilities plays attempted to row back at the start of the year by initiating a range of tariff cuts, and SSE went one step further by vowing not to raise standard household energy prices until July 2016 at the earliest. But the size of these reductions drew much ire from consumer groups and politicians alike, who claimed that these cuts came nowhere near to matching the colossal drop in wholesale prices.

And of course Centrica, SSE, et al, are also facing an ongoing investigation by the Competition and Markets Authority (CMA) over whether they are levying exorbitant charges on their customers.

With many speculating that the CMA may suggest a range of draconian measures, from even-greater tariff cuts, through to a break-up of Britain’s major suppliers, the landscape is likely to get even more difficult for the energy sector.

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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.