POWER STRUGGLE Breadth of investment makes SSE strong - and ripe for

0 Comments | Sunday Herald, The, Feb 15, 2009 | by Steven Vass

Newbery says: "Concentration gives market power and market power means higher profits. Consolidation is therefore the name of the game in any industry."

Having said this, SSE is well used to takeover speculation. Before Vattenfall became the rumour of choice, the company was regularly linked with ScottishPower, and its independence argument to shareholders has always been that no-one else could run the company better than the current board, led by chief executive Ian Marchant.

The company's strategy is partly about winning new customers by paying close attention to customer service and keeping prices lower than competitors. SSE has done this to great effect this decade, more than doubling its customer base to nine million in seven years to become the second-largest provider in the UK behind Centrica (which has around 12 million).

As a kind of electricity equivalent to Asda, it has turned the row over rising power prices to its advantage by being among the last to raise prices and among the first to cut them in recent months. This has meant foregoing short-term revenues and profits, and was the main reason why pre-tax profits fell 55per cent to GBP303 million in the first half of the financial year 2008 (though it is on course to turn this into a small rise in full-year profits due to a stronger second half, ending on March 31).

The second part of the company's strategy is to grow and further diversify generating capacity, particularly in renewables. SSE has said it aims to double its UK renewable capacity from the current 2GW (which includes 1.4GW hydro, 0.6GW wind power and a small amount of biomass) as part of a GBP6.7bn capital expenditure plan over the next five years. This looks achievable given that SSE has another 2GW of wind capacity either consented or under construction. (It has raised GBP2.7bn in bond and share issues to help finance this in the past six months, GBP500m of which will be spent overseas . ) The company also wants to push into nuclear, having last month announced a joint venture with ScottishPower and France's GDF Suez to bid for two lots of suitable sites being auctioned by EDF as a condition of its British Energy acquisition, and by the Nuclear Decommissioning Authority. In a world where carbon trading will make gas-fired and coal-fired electricity ever less attractive, SSE's 20per cent stake in a second British nuclear provider would be another way to protect profitability, regardless of what Alex Salmond has to say about the industry.

In sum, the message to shareholders is that there will be incremental growth in profits and dividends in the short term, and if they bear with the company, it will be stabler and more powerful in five years' time.

HOBSON argues that the customer service part of the strategy would not have worked had the company been part of a bigger group. "SSE has done very well compared to the likes of British Gas, E.ON and EDF because it has been able to react to market conditions faster, " he says.

Yet others wonder whether it is sustainable in the medium-term. SSE might like to play the consumer champion, but it still has to keep its shareholders happy. In order to produce full-year profits growth this year, it delayed announcing price cuts until after British Gas, and its 9per cent cut in electricity and 4per cent cut in gas prices are smaller than its 19per cent and 29per cent rises last August, which themselves came on the back of rises that April.