The UK government announced on April 21 that it will increase the electricity levy by 10% to 55% to push renewables power producers exposed to wholesale power prices to switch to contract-for-difference as of next year. SSE SSE, Centrica CNA, Orsted ORSTED, and RWE RWE are trading 2%-4% higher at the time of writing.
Why it matters: These measures removed fears of a harsh intervention that arose last week after the UK chancellor, Rachel Reeves, signaled plans to reduce the link between electricity and gas prices. It could even have a positive impact, depending on the contract-for-difference price offered.
- The electricity levy is applied above a threshold of £75/MWh, which is above our £60/MWh midcycle power price assumption and our estimates of achieved power prices over the next three years for the UK power producers. Therefore, the 10% increase has no impact on our forecasts.
- Should the contract-for-difference price be set above our midcycle power price assumptions, this would increase our long-term estimates.
The bottom line: Pending more details about the contract-for-difference price offered, we confirm our fair value estimate of GBX 200 for Centrica, GBX 2,480 for SSE, EUR 51 for RWE, and DKK 160 for Orsted. Shares look fairly valued.
Key stats: One-third of UK renewable power is exposed to wholesale power prices. This is mostly power from plants commissioned before 2017 that are eligible for the renewable obligation certificate, or ROC, regime. They receive a set number of ROCs per MWh produced, in addition to the wholesale market power price.
- We reckon that the ROC-eligible output for SSE, Orsted, and RWE amounts to 6.5TWh, 4 TWh, and 6 TWh, respectively. This represents half of SSE’s fiscal 2025 renewable output, 16% of Orsted’s 2025 offshore wind output, and 12% of RWE’s 2025 renewable output.
- Centrica has limited ROC exposure but is exposed to the electricity levy through its nuclear output.
