For UK power generation companies, including SSE PLC (LSE:SSE), Centrica PLC (LSE:CNA), and Drax Group PLC (LSE:DRX) the autumn statement from Jeremy Hunt, including a new windfall tax on energy generators, "materially derisked the outlook" and could lead to earnings upgrades, according to JPMorgan.
The new chancellor unveiled a temporary 45% levy on electricity generators and an increase to the energy profits levy as part of his fiscal package.
The investment bank reiterated its "positive view" on the trio "as we believe investors have enough visibility on earnings to turn more positive", though it said there remain some questions to be answered for the sector.
Acknowledging that some people were hoping the chancellor might have doled out more generous investment allowances or a higher threshold for excess profits as part of the budget statement, the analysts said pointed out that "these companies still have significant leverage to higher power prices, and we anticipate earnings upgrades to come".
Analysts at UBS said the new marginal rate of 45% is slightly higher than reported earlier in the week but the threshold of £75 per megawatt hour (MWh) is "higher than we expected – and is about 50% higher than the average UK power price over the last decade".
They also noted that as the measure comes in the form of a percentage tax rather than a cap it "should be positive" for the companies.
From an investment point of view, JPMorgan's analysts suggested that SSE, Centrica and Drax offer "positive earnings momentum at attractive valuations, with opportunities for value creation in a volatile energy environment", including from gas storage, flexible generation and trading.
Similar feelings were shared elsewhere, with Citigroup saying the budget statement "increased clarity", with Centrica its preferred UK utility.
Citi said the chancellor had provided "the clearing event that we had looked for" in Drax and SSE, but analysts believe the story for Drax's shares "is far from smooth sailing" due to the debate around the ESG credentials of biomass, while for SSE they see the value creation from renewable investments as "unclear", given the higher capex and cost of capital.