UPDATE 2-Price cap plan wipes more than 1 billion stg off UK energy firms
* Labour's power price freeze plan hits utilities stocks
* Proposal questions Britain's free-market energy model
* Analysts warn price caps will hit investment
* Price freeze threat could lead to faster price hikes now
(adds quotes and price data)
BRIGHTON/LONDON, Sept 25 (Reuters) - Shares in UK utilities fell on Wednesday after the market digested a plan by the opposition Labour party to freeze power and gas prices if elected in 2015, throwing Britain's liberalised energy industry into doubt.
More than 1 billion pounds ($1.61 billion) was wiped off the value of Britain's two biggest listed companies SSE and Centrica, with each down about six percent in high trading volumes.
Labour's plan, set out by leader Ed Miliband on Tuesday, would involve capping business and consumer energy bills until January 2017, breaking a decades-old tradition of liberalised energy markets in Britain.
Coming just months after the government's energy bill, the opposition plan adds a political risk that investors might find hard to stomach.
Unlike most of Europe, where one or two often state-owned companies dominate power markets and where regulated tariffs are the norm, the British market has six major players which freely set prices to compete for customers.
However, this competition has not brought down UK energy prices as much as regulators had hoped.
Last year, British households paid slightly more than the European Union average at 13.82 euros per giga-Joule for gas and 0.16 euros per kilowatt-hour for electricity, Eurostat data show.
Rising energy costs have become a hot political issue. Britons believe energy prices are the biggest threat to Britain's economy, ahead of unemployment, inflation, interest rates and taxes, data from opinion poll provider YouGov showed.
"We've got a market that isn't working. Somebody has got to stand up and press the reset button on this market," Miliband told Sky News on Wednesday.
"I'm in favour of competition, I'm in favour of markets, but they have got to be effective markets and it's got to be effective competition," Miliband added.
Miliband was Energy and Climate Change Minister in 2008-2010 under the last Labour government and has long been in favour of tighter market supervision.
Edward Davey, a Liberal Democrat currently holding the position of Energy Secretary, condemned the Labour Party proposal to cap prices, saying it would deter investments in new power plants and a better way to reduce bills was to use energy more efficiently.
A Labour source close to Miliband said on Tuesday the plan could cost energy suppliers 4.5 billion pounds ($7.2 billion), although it was not clear to what extent this cost would hit profits.
The plan could wipe out Centrica's supply profit for two years and knock around a third off its operating profit, according to Liberum Capital utilities analyst Peter Atherton.
In recent years, UK utilities have fared far better on the stock market than their continental peers who have struggled with fast-changing regulation and competition from solar and wind energy.
Shares of SSE and Centrica, despite Wednesday's fall, trade around 10-year highs and at around three times their book value, while stocks of European counterparts like Germany's E.ON and French GDF Suez have spent most of 2013 near all-time lows.
But Britain's paradigm of ultra-free energy markets is slowly changing, and the current conservative-led government's electricity market reform, which wants to encourage lower carbon emissions, is seen by many as a first step to re-regulation.
"The inflection point came three years ago when the discussion on the energy market review started," said consulting firm Compass Lexecon's Fabien Roques.
Energy investors were shocked by Labour's announcement, and some compared Miliband's proposals to German Chancellor Angela Merkel's surprise 2011 decision to phase out nuclear power following the Fukushima accident or Russian President Vladimir Putin's plan to order a price freeze on gas and power.
The irony of Labour's announcement is that it is likely to cause higher energy prices in the short-term, said Liberum's Atherton, as utilities will go on a buying spree to cover their energy needs for 2015-16 when retail prices will be frozen. ($1 = 0.6224 British pounds)
(Additional reporting by Christine Murray, Sarah Young and Peter Griffiths in London and Geert De Clercq in Paris, writing by Geert De Clercq;Editing by Elaine Hardcastle)