By Joe Stonor
Shares in U.K. energy companies dropped after the government said it would intervene in the country's power market in moves that could limit the prices that power generators charge.
SSE and Centrica stock fell by 7.3% and 7.4%, respectively, in afternoon European trade. German group RWE and Danish offshore wind-farm developer Orsted, which also generate power for the U.K. grid, fell by 4.9% and 2.4%, respectively.
U.K. treasury chief Rachel Reeves said late Thursday that she would intervene to cut the link between electricity costs and gas prices in the U.K, the Financial Times reported. More details will be set out in the coming days, she said, according to the FT.
U.K. wholesale electricity prices are set by a system that typically results in the costliest source of energy determining the overall price. As a result, even when cheaper renewables are the primary source of electricity, more expensive gas can elevate prices.
Decoupling gas and electricity could therefore weigh on energy companies' earnings, Citi analysts said.
"SSE shares reflect very little of government intervention risk that is starting to materialize," the bank said.
If gas and electricity prices in the country decouple, SSE and RWE could see hits to net income in 2028 of 6% and 5%, respectively, according to Citi's calculations. Centrica and Orsted income would be 3% and 2% lower than previously expected, respectively.
Explaining the government's intervention, Reeves said that decoupling gas and electricity prices would help lower costs, the FT reported. Gas prices set the wholesale price of electricity "a large majority of the time," according to energy regulator Ofgem.
Reeves didn't provide detail on how prices would be decoupled. The U.K. government previously rejected proposals to split the U.K.'s market between renewables and gas-powered electricity.
The U.K. government is right to intervene in order to shield consumers from higher energy costs resulting from the U.S.-Iran war, a spokesperson for SSE said.
"We would expect any measures regarding wholesale markets to encourage homegrown energy, while supporting the investment needed for long-term affordability, energy security and economic growth," the spokesperson said.
The withdrawal of a tax on fossil fuels announced by the U.K. government on Thursday could also add downward pressure to the companies' earnings. Removal of the carbon price support--which has placed an extra charge on fossil-fuel power stations for their carbon emissions since its 2013 introduction--will likely cause carbon prices to fall, lowering the prices that renewable generators can charge over the medium-to-long term, Jefferies analysts wrote in a note to clients.
An RWE spokesperson welcomed the confirmation of a timeline for the end of carbon price support, which the government said would run until April 2028. The phasing out of the measure is already reflected in wholesale prices, the spokesperson added.
Centrica didn't immediately respond to request for comment while Orsted declined to comment.
Write to Joe Stonor at josephmichael.stonor@wsj.com
(END) Dow Jones Newswires
04-17-26 1135ET
