SSE: diversity of profit sources proves a boon for utility

Eighteen months ago SSE was in the eye of a storm. These can knock down electricity lines, less so power plants. Activists nevertheless wanted to break it up. Longstanding boss Alistair Phillips-Davies can feel justifiably warm and dry after holding firm.

Arguments for a break-up centred on SSE’s “inefficient” structure. Yet its diversity helped last year as Russia’s invasion of Ukraine shook up energy markets. Today its shares trade on a forward earnings multiple of more than 12.5 times, cheaper than some European peers such as Iberdrola on 16 times, as well as National Grid at 15.7 times.

SSE’s thermal generation business contributed most to adjusted annual pre-tax profits, up 89 per cent to £2.2bn. UK gas-fired power plants help to meet electricity demand when renewables such as wind and solar units cannot. SSE Thermal also owns gas storage facilities.

Profits growth at SSE’s renewables business — which was at the heart of spin-off calls — was ironically damped by insufficiently blustery weather conditions last year. A UK windfall tax on low carbon electricity generators cost it £43mn. Less diverse companies such as Denmark’s Orsted have recently fared less well.

SSE wants to expand all three of its units, including its UK regulated electricity networks. It upgraded investment plans to spend £18bn by 2026/27, although half of this will go towards networks. Previously SSE had been targeting £12.5bn of capital investment by 2025/26. Last year’s strong performance also means SSE will no longer have to sell a stake in its electricity distribution network business to fund its investments.

Do not expect blue skies throughout. SSE still has to deal with rising supply chain costs. Indeed, £2bn of the upgrade to its investment plan accounts for this. New projects in the UK are also facing hold-ups in securing grid connections. SSE does lack exposure to the US, where clean energy companies are flocking to take advantage of the Inflation Reduction Act.

Nevertheless, SSE shares have fared well so far this year, rising 12 per cent. The chill wind of break-up calls could return. But for now SSE should have done enough to silence its critics.