Shares in British Gas owner Centrica PLC (LSE:CNA) and gas and renewables electricity generator SSE PLC (LSE:SSE) jumped after new prime minister Liz Truss ruled out a windfall tax on energy companies, while expectations on new support for fracking were played down.
SSE shares rose 5% and Centrica's almost 4% as Truss answered her first Prime Minister's Questions in her new role, saying: “I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy.”
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One of Truss's new cabinet appointments had raised hopes for others in the energy sector. Jacob Rees-Mogg has been appointed business secretary and also took on responsibility for the energy brief, without a separate dedicated junior minister.
With Truss having supported scrapping green levies and bringing back fracking, while Rees-Mogg earlier this year voiced his support for fracking and spoke of getting “every last drop” of oil and gas from the North Sea, fossil fuel-focused companies have been expected to get a boost from the new cabinet.
A host of UK small-cap oil and gas companies have already been climbing in recent days as Truss closed in on the race to move into 10 Downing Street.
With Rees-Mogg having in the past blamed “climate alarmism” for high energy prices, there was concern about the new leadership among investors and companies focused on renewable energy and the push to cut greenhouse gas emissions to net zero.
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But Westminster insiders close to Rees Mogg said the Tory MP, whose asset management firm Somerset Capital Management focuses on emerging and frontier markets, has committed to the government's target of getting to net zero by 2050.
There were conflicting media reports on the likelihood of the fracking ban being overuled.
The PM’s press secretary told one reporter: “She made clear her position during the campaign but I’m not going to get into what’s in this energy package.”
Another was told by the same spokesperson that Truss will stick to the Conservatives’ 2019 manifesto promises, saying “the manifesto stands” when asked about fracking. The election manifesto placed a moratorium on fracking.
Freezing bills = peak inflation and shallower recession?
Opposition leader Keir Starmer said the new PM's reticence about a windfall tax was protecting energy companies and their “vast profits”. He pointed to Treasury estimates that energy producers will make £170bn in excess profits over the next two years.
The Labour leader said that Truss “knows that every single pound in excess profits she chooses not to tax is an extra pound on borrowing that working people will be forced to pay back for decades to come”.
Truss is expected to announce a package of support on Thursday for households and businesses to cope with excessive energy prices, with a reported cost of more than £100bn.
The cost may be funded by taxpayers, according to reports, or via loans to utilities to keep household bills constant, with power companies allowed to add a surcharge on energy bills in the future to raise funds to repay the loan.
Some economists have suggested the plans could mean that UK inflation may reach its peak sooner, if it has not already.
"Inflation may already have peaked in July," Barclays said this week, if household energy prices are frozen at April levels.
If household energy bills remain constant instead of rising in October and again in January, Berenberg estimated that inflation could be around three percentage points (ppt) lower in the fourth quarter of 2022 and some 4ppt lower in the first quarter of 2023 than otherwise.
"On its own, that could take our forecasts for UK inflation from 12.8% yoy to circa 10% for Q4 and from 13.3% to circa 9.5% for Q1," said economist Berenberg Holger Schmieding, which means the expected UK recession "could also be somewhat shallower than we currently project".
A policy to freeze the utility price cap at £2,500 until sometime in 2024 will "dramatically lower the near term path for CPI", agreed Paul Dales at Capital Economics, but would boost inflation further ahead and mean a stronger chance that interest rates are likely to eventually reach 3%.
He suggested that such a policy, if put into place, would see inflation as measured by the UK consumer price index peak around 11.5% in November, rather than rise to nearer 14.5% in January.
Dales also imagined it might lead to a shallower recession, "perhaps with a peak-to-trough fall in GDP of around 0.5% rather than 1.0%".
But a freeze on energy bills was not a fair way to handle the problem as it will most benefit "better-off people who use more energy", Paul Johnson, director of the Institute for Fiscal Studies, told BBC radio.
"So this is very poorly targeted. Not only is it poorly targeted, but it also means that we don’t see the full price signal, that across the world people need to see. The reason that gas prices are so high is because there’s less gas around and if the world doesn’t use more gas over the net year then we’re going to run out," Johnson said.