The UK government’s efforts to reduce electricity costs by separating them from gas pricing could put downward pressure on wholesale power markets and weigh on companies with exposure to UK generation.
Chancellor Rachel Reeves said she and Energy Secretary Ed Miliband are developing proposals to “delink” electricity prices from gas, with further details expected “in the next sort of few days, weeks.”
Currently, the UK electricity market relies on a marginal pricing model, where gas-fired plants frequently determine the overall price of power.
Analysts at Jefferies warned that such changes could have negative consequences for utilities with exposure to merchant renewable and nuclear generation in the UK, including Centrica Plc (LSE:CNA), SSE Plc (LSE:SSE), RWE (TG:RWE), and Ørsted (TG:D2G).
“We flag two potential negative developments for utilities exposed to renewable/nuclear merchant generation assets in the UK,” Jefferies said in a note, pointing to both the proposed pricing reform and the planned removal of the Carbon Price Support from April 2028.
The Carbon Price Support is a levy applied to fossil fuels used in UK power generation and plays a role in setting electricity prices when carbon-intensive sources, such as gas, determine the marginal cost.
Jefferies estimates that a shift of around £5 per megawatt hour in power prices could translate into a 2% to 3% hit to net income for UK generators, with Ørsted seeing an impact of roughly 1%.
Reeves also noted that the government is working through the technical aspects of North Sea oil and gas “tiebacks,” which involve using existing infrastructure to bring additional resources into production.
Leave a Reply