Power companies such Drax and SSE could lose out as the government tries to balance short-term political imperatives to tackle inflation/cost of living and provide a stable long-term environment that attracts private capital to deliver net-zero, according to Citigroup.
“Seismic changes” could be on the horizon for the electricity market following the government’s forthcoming review, the US bank said today.
"We fear short-term politics will prevail. While recent press highlights the prospect that a power windfall tax is off the table, we believe any relief (if confirmed) is likely to be short-lived with the prospect of an accelerated introduction of REMA (Review of Electricity Market Arrangements) that delinks power and gas prices, and lower profits of power generators."
For No.10 and the Treasury, that would mean a 'win-win' of keeping energy bills low, while curbing inflationary pressures.
Citi rates Drax Group (LSE:DRX) as a 'sell', while the investment bank maintained a ‘neutral’ rating for SSE PLC (LSE:SSE) and a ‘buy’ on Centrica PLC (LSE:CNA).
The UK government is expected to consult next month on its review of the electricity market under the Net Zero Strategy, which was instigated to save up to £10bn a year in unforeseen power costs.
Citi believes an accelerated introduction of the market review, with a consultation due to take place before mid-July, will “delink” power and gas prices.
The government said in April that it would be “undertaking a comprehensive Review of Electricity Market Arrangements (REMA) in Great Britain, with high-level options for reform set out this summer”.
The last series of electricity market reforms instituted from 2010 to 2015 introduced a contracts-for-difference scheme to set long-term power prices for low-carbon power.
Shares in Centrica today rose 1.7% to 82.6p, SSE eased 0.7% lower to 1,638p and Drax dropped 1.8% to 642.5p.