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'Blackout' warning for UK after energy freeze pledge

Wednesday, 25 Sep 2013 | 5:43 AM ET
Capin Zaini | Flickr | Capin Zaini

The U.K.'s biggest utilities have hit out at plans by the country's opposition party to freeze energy prices if it wins the next general election in 2015.

Energy stocks slumped in London Wednesday after Ed Miliband, Labour Party leader, said that once it got in government it would look to freeze gas and electricity prices until the start of 2017.

Rising energy costs has been one of the main squeezes on living standards in recent years, despite suppliers reporting substantial profits. Miliband's populist pledge may have appealed to voters but energy companies have been quick to detail problems with any cap in prices.

(Read More: Labour: We'll increase bank levy for more free childcare)

"Freezing the bill may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000 plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone," Angela Knight, chief executive of Energy UK, the trade association for the energy industry, said in a statement after the speech.

Centrica, one of the so-called "big six" U.K. energy firms - which also includes SSE, Scottish Power, E.On, EDF Energy and NPower – said that the rise in energy prices in recent years has been down to higher commodity costs, increases in regulated transportation and environmental costs and taxes.

"The impact of such a policy would be damaging for the country's long term prosperity and for our customers," it said in a press release. NPower highlighted similar issues saying that the only way a cap could work is if commodity cost increases could be prevented, new investment was shelved and an upgrade for household meters was put on hold.

(Read More: Labour Party vows energy bill freeze to woo voters)

But handsome profits reported this year by these companies have fanned the flames of anger against what many see in the U.K. as a sector that needs restructuring.

"The system is broken and we're going to fix it," Miliband said at the Labour party conference in Brighton on Tuesday. "They've been overcharging people for too long because of a market that doesn't work. It's time to reset the market."

Crisis in the UK's energy policy?
Peter Atherton, head of utilities research at Liberum Capital, tells CNBC that Labour energy policies risk hitting companies hard and breaking the energy compact.

A Labour Party source later told the Reuters news agency that energy suppliers could be forced to take a hit of £4.5 billion ($7.2 billion) as a result of the measure. But the saving is believed to leave a typical household £120 better off and a business £1,800 more to spend.

Shares of Centrica fell to the bottom of the pan-European Euro Stoxx 600 Index on Wednesday, trading 3.9 percent lower. Shares of SEE were 3.5 percent lower and tracked E.On 1.18 percent lower.

(Read More: UK IPOs surge in best post-crisis performance)

Peter Atherton, the head of utilities research at Liberum Capital has been warning since April that the "inherent contradictions" and "implausibility" of U.K. energy policy would eventually trigger a crisis, and on Tuesday those concerns crystallized, he said.

"Investors will need to reconsider the relative attractiveness of the U.K. utility market now that the crisis in policy has been triggered," he said in a research note on Wednesday, adding that companies should consider a legal challenge to Labour's proposal and reduce exposure to volatile supply costs.

"Centrica should accelerate its already announced move to switch growth capex (capital expenditure) away from the U.K., and SSE would be prudent to focus its capex even more on network rather than generation," he said.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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