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National Grid Stock (NG.L) Dives After Cap Cut Adds To Negative Rights Issue Sentiment

Analyst Team trader
Updated 24 May 2024

Shares of National Grid PLC (LON:NG) are trading down by 9.33% in early trading following a substantial cut to the energy price cap announced by Ofgem, the UK energy regulator. Since Wednesday, the stock price is now almost 20% in the red, with holders looking for a shift in momentum.

The move from Ofgem signposts a reduction in potential revenue for energy suppliers, shaking investor confidence in the utility sector. The announcement detailed a reduction of £122 in the energy price cap, with the new limits set to £1,568 for direct debit customers, effective from July until the end of September. This decision marks a notable decrease from the previous cap of £1,690.

The updated price cap translates to electricity costing 22.36p per kilowatt-hour and gas being priced at 5.48p per kilowatt-hour. The price cap is a mechanism designed to protect consumers by setting a maximum charge for energy suppliers to bill their customers, typically reviewed bi-annually to reflect changes in the wholesale cost of energy.

The timing of Ofgem's announcement coincides with a challenging period for National Grid. The company had recently embarked on a deeply discounted rights issue on Thursday, an event that often leads to downward pressure on a stock due to the dilution of existing shares. The convergence of these two events— Ofcom's price cap cut and the rights issue—has resulted in heightened selling activity, sending National Grid's share price tumbling.

In response to the regulatory news, National Grid's stock was recently trading at 911p, down from the 52 week highs of 1,145.5 set just some days ago. The market's reaction underscores investor wariness regarding the energy sector's profitability amidst regulatory pressures. Ofgem's commitment to shielding consumers from volatile energy prices comes as a counterbalance to the interests of energy companies concerning the potential for profit maximization.

In conclusion, the dual impact of the Ofgem price cap reduction and the rights issue has compounded adversities for National Grid, as evidenced by the significant drop in their share value. Investors are now grappling with the implications of tightened regulatory constraints at a time when energy companies are already navigating complex market dynamics. National Grid, like other utilities, must adapt to the evolving regulatory landscape while striving to maintain its financial stability and long-term value proposition to shareholders.

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The AskTraders Analyst Team features experts in technical and fundamental analysis, as well as traders specializing in stocks, forex, and cryptocurrency.