S&P Global Ratings warns of 'Big Six' margin pressure, earnings volatility

Energy market reforms may reduce market share and margins, and hike earnings volatility for the so-called 'Big Six' sector players in the UK, warns S&P Global Ratings.

The Competition and Markets Authority (CMA) and UK electricity regulator Ofgem have announced a number of reforms and changes after CMA's review of the sector.

S&P Global Ratings said the reforms were not as detrimental as feared, but expected CMA's planned changes to exacerbate the current decline in the Big Six's market share and margins.

They would potentially also hike earnings volatility among the six, which included Centrica, EDF Energy, SSE, RWE AG, E.ON UK and Scottish Power.

"The potential impact is greatest for Centrica and SSE, because a higher share of their earnings is exposed to the U.K. retail market," S&P Global Ratings said in a note.

"We consider that the initiatives to increase transparency and efficiency of the energy market will continue to support investor confidence generally," it added.

The reforms would enable new competitors to access the market more easily and quickly, and S&P Global Ratings did not expect its ratings on the dominant players to be immediately affected.

"Since mid-2013, new entrants' combined market share has increased to almost 13%, while that of the Big Six has started to decline," the ratings firm said.

"We expect the changes to put further pressure on the Big Six by lowering retail margins and potentially increasing volatility of earnings within their UK retail businesses.

The regulatory changes included measures to encourage greater transparency, competition and customer flexibility. Most should be in place by 2018.