Positive Market Reaction Expected#
Morgan Stanley believes that UK power generation stocks, such as SSE, RWE, Orsted, Centrica, and Drax, will likely see a favorable response in the market following recent government announcements regarding electricity pricing reforms.
Changes to the Electricity Generator Levy#
The UK government plans to raise the Electricity Generator Levy (EGL) from 45% to 55%, effective July 1, 2026. This tax applies to electricity generators when prices exceed a certain threshold, which will remain at £75 per megawatt-hour in 2023 terms. For 2026, this threshold is estimated to be £82.61 per megawatt-hour and £84.43 for 2027.
Minimal Impact on Earnings#
Morgan Stanley estimates that the increase in the EGL will have a minimal impact on earnings per share for the affected companies, projecting changes between negative 0.1% and negative 0.3% for the fiscal year 2027. The bank notes that many companies have already hedged their exposure at lower prices, which could mitigate the effects of the tax increase.
Future Developments and Carbon Price Support#
Later in 2026, the government will provide more information about a 2027 auction that will allow asset owners with older Renewable Obligation Certificate contracts to switch to Contract for Difference agreements. Additionally, the government announced the removal of the £18 per ton Carbon Price Support starting April 1, 2028, which may further influence the market dynamics for these power generation stocks.