Any weakness in energy utility share prices due to reforms being proposed by the European Union should be regarded as a buying opportunity, according to JP Morgan.
EU politicians have been discussing making energy and electricity markets more resilient when emergency tools expire if the Ukraine crisis eases.
The main aims will be to shield consumers from higher prices and weaken the link between electricity and gas while accelerating the deployment of renewable capacity, JP Morgan added.
In practice, this will mean a move toward more long-term contracting, which should give investors much-needed visibility, especially against the backdrop of volatile market prices and uncertainty around market interventions.
While details surrounding volumes impacted, the duration of contracts, timings and limitations on free market pricing will remain uncertain for some time, JP Morgan believes EU proposals on 16 March will imply evolution rather than revolution and any weakness caused by the uncertainty should be seen as an opportunity.
“Once details of electricity market design are known, a shift towards long-term contracting should drive a rerating of the utility sector, with attention shifting to the resilient relative earnings momentum. “
In that scenario, JP Morgan’s top UK picks on a read-through are Centrica and SSE, which are both rated as 'overweight'.
Shares in Centrica rose by 0.5% to 105.2p, while SSE was 0.8% higher at 1,732p.