OREANDA-NEWS. The Brexit vote will have a range of effects on UK-focussed utilities, with potential benefits for some from a weaker pound and higher inflation, but greater regulatory uncertainty and increased risk for firms with Scottish operations, Fitch Ratings says.

Weaker sterling supports higher UK wholesale baseload electricity prices due to the link to dollar-denominated oil, gas and coal prices and because of more expensive imported electricity from Europe. Sterling UK baseloads have risen 8% since the beginning of June to GBP37/MWh and could increase further as the effect of higher gas prices is not yet fully reflected.

This will be positive for renewable energy companies such as Infinis and Melton Renewable Energy, but only if higher prices are sustained, because their output is contracted forward for six to 12 months. Centrica's exploration and production and SSE's renewables will benefit, although this will be offset by higher gas costs for gas-fired generation and residential supply.

The "leave" vote creates uncertainty around UK government energy policy and the extent to which it will continue to reflect EU renewables policy in the longer term. It also raises the chances of a second Scottish referendum on independence, which would create further uncertainty for SSE and Iberdrola's Scottish Power. The main risks for the sector from a breakup of the UK would be related to currency and market arrangements and the remuneration of Scottish wind assets through bills paid by customers throughout Great Britain.

Excluding the UK break-up risks, Iberdrola's exposure to Brexit is mainly due to UK pound translation. We estimate the impact from pound depreciation will be no more than a 0.1x increase in FFO-adjusted net leverage to 2020 due to well-balanced cash flows and debt denominated in pounds. The impact on E. ON and RWE is also likely to be small as UK supply or generation account for less than 5% of EBITDA at both companies. Both companies have renewables capacity in the UK and they have issued pound-denominated debt.

Major capital projects are likely to face further uncertainty following the vote, especially EdF's Hinkley Point project. Deferral of the investment decision on the project, combined with higher power prices, could be credit positive for EdF.

We expect the impact on UK regulated water companies and gas and electricity networks to be limited because of the domestic customer base, minimal foreign-currency exposure and no direct link to the performance of the UK economy. The likely increase in inflation due to weaker sterling and the potential lower cost of debt should benefit companies as regulated revenues and regulatory asset base are both linked to RPI. This is likely to result in higher customer bills.

We do not expect any near-term changes to the regulatory frameworks or government policies on regulated networks. Most European directives that apply to UK regulated networks are embedded in UK law and the current regulatory frameworks for electricity and gas transmission and distribution are in place until 2021/2023. The regulatory framework for water runs until 2020.

We also expect no significant impact on the availability of debt funding for UK regulated networks, either through debt capital markets or bank lending. The European Investment Bank is the largest single bank providing financing to the sector. The availability of EIB funding in the longer term will depend on the UK exit negotiations, but none of the networks' existing EIB facilities have break clauses that would be triggered by Brexit.