Limited impact from UK capped tariff
- The UK government rolled out an Energy Bill Relief Scheme to provide a discount on wholesale gas and electricity prices for non-domestic companies.
- Impact on SCI could be limited as we estimate UK’s net profit to be 7-8% of group’s profit, shared among Wilton assets, UKPR and battery storage.
- We see SCI as a value pick as it trades at 7.8x FY23F P/E vs. regional utilities peers’ 14x FY23F P/E. SCI is one of our SG top picks. Maintain Add.
UK government to halve wholesale gas and electricity prices
On 21 Sep, the UK government rolled out a £150bn Energy Bill Relief Scheme to provide a discount on wholesale gas and electricity prices for non-domestic customers. This package will last through the winter season, from 1 Oct 22 to 31 Mar 23, after which further help will be extended to companies in vulnerable industries. Wholesale prices for electricity will be capped at c.£211/MWh for electricity and £75/MWh for gas. We understand that the final unit cost and mechanism is still pending government’s confirmation.
What is there in the UK?
As of 1H22, SCI’s UK’s conventional power assets comprised c.126MW gas fired plants (Wilton Power Station), and 35MW of biomass power. It also has 684MW of flexible generation assets (UKPR) with 70MWh of energy storage. Prior to Covid (FY17-19), the UK contributed about S$21m of profits p.a. In FY20, it generated S$7m of net profit affected by lower flexible power and reduced triad income. For FY21, we estimate UK net profit to be about S$30m-40m or 7-8% of group’s profit, on the back of strong merchant market.
Cap is still representing an 83% yoy increase, UKPR not affected
We note that the cap on electricity prices of £211/MWh in Oct 22 still represents a 21% YTD increase and 83% yoy increase from Oct 21 (Fig 1). This is in tandem with the increase in natural gas prices which have increased 30% YTD and 22% yoy. We think margin erosion may not be significant for SCI’s UK conventional energy power. In addition, we believe the tariff cap will not affect UKPR given its flexible generation nature. 553MW of UKPR’s capacity is contracted capacity market scheme as well as Short-term Operating Reserve (STOR) contracts for the provision of reserve energy with Low Carbon Contracts Company of National Grid ESO with a tenure of 2010-2034.
Energy storage, a key driver for the UK
SCI UK is also building a 360MW battery storage system at Wilton International on Teesside, of which 150MW of two-hour duration battery has been contracted over a 15- year period (starting 2023). All in, SCI UK targets a total of 420MWh of battery capacity, one of the UK’s largest battery portfolios, allowing SCI to provide rapid response time.
Value renewable play in ASEAN, TP based on 12x CY23 P/E
Our TP of S$4.78 is a 10% discount to regional utilities peers’ of 14x CY23F P/E. Catalysts: stronger-than-expected renewable and/or conventional energy profits. Risks: prolonged unplanned shutdowns, unfavourable regulatory changes.