Carbon tax freeze ‘would shave 6 per cent off SSE earnings’

A carbon floor price freeze would harm SSE profits and boost the outlook for coal generator Drax, analysts have said ahead of tomorrow’s Budget announcement.

The anticipated freeze would knock earnings before interest and tax (Ebit) at SSE by nearly 6 per cent in 2016/17, according to modelling by Liberum Capital. Centrica would take a smaller hit of around 2 per cent, while Drax would get a 6 per cent boost.

Chancellor George Osborne is widely tipped to keep the carbon floor price at £18/tCO2 from 2015/16 instead of escalating it to the end of the decade as previously assumed.

That will suppress the wholesale power price by £2 to £6/MWh, Liberum estimated, by removing a cost on fossil fuel generation. A drop in the power price will in turn hit the income of low carbon generators.

Liberum analyst Peter Atherton noted the political appeal of the move. He said: “On the political front, a freeze would allow the government to be seen to be doing something positive for ‘hard hit consumers’. By bringing down forward wholesale power prices the government would also lower the likelihood of material tariff increases next winter, which given the potential political sensitivity around energy costs would be a significant benefit to the government.”

A freeze would reduce tax revenues, but not until after the next election, Atherton added.

The prospect of a freeze has been welcomed by energy intensive industries, who argued the price floor put them at a disadvantage against European competitors. Atherton noted that even with a freeze, the tax will maintain a gap between the UK and continental European carbon price of around £20/t.

The Nuclear Industry Association and Renewable UK, on the other hand, have warned the move could damage investment in low carbon energy.