Update: The government has announced plans to remove the carbon price support (CPS) tax on fossil fuels used in electricity generation, putting more pressure on the valuations of renewable funds.
Greencoat UK Wind (UKW), one of the loudest critics of the government’s change to the inflation link in renewable subsidies late last year, says its initial assessment is that the move could reduce the company’s net asset value (NAV) after debts by 3-5p per share.
The 10%-yielding alternative income fund ended last year with NAV per share of 133.5p, down from 151.2p at 31 December 2024. A 5p reduction would lower that NAV by 3.8%.
Its shares initially slipped 1.9p to 101.6p in response but slid further to close 4.6% down at 98.8p on reports that the government was expected to raise the windfall tax on low carbon electricity generators on Tuesday to help shield household energy bills from the surge in crude oil caused by the blockade of the Strait of Hormuz in the US-led war on Iran.
The Guardian said this would come alongside government plans to cut the link between electricity and gas prices and further changes to the long-standing renewables obligation certificate (ROC) incentive scheme.
The Renewables Infrastructure Group (TRIG) fell over 2% to 66.4p on Friday despite reassuring investors that the impact of the removal of CPS would be “modest” at 0.5p per share.
Investec analyst Ben Newell said: “We would expect UKW to be most impacted within the peer group, given its pure UK focus and greater exposure to merchant power prices.” TRIG took a more cautious approach, he said, of using a blend of forecasts and a high 75% proportion of fixed revenues over the next five years, as well as having around 40% of its assets outside the UK.
NextEnergy Solar (NESF) slid 3.8% to 45.8p. It anticipated a 0.8p to 1.9p hit to NAV per share, saying the impact of wholesale prices being lowered by around £4-5/MWh from April 2028 to the early 2030s and around £2-3 lower after that was mitigated by the fact that gas does not set prices in all hours when renewables are generating.
UKW explained that CPS tops up the UK emissions trading scheme (ETS) price by £18 per tonne of carbon dioxide. It feeds into electricity prices where a carbon emitting generator, such as a gas plant, is the marginal price setter, it said.
Forecasts by the fund manager Schroders Greencoat had already assumed that CPS rates would fall significantly as renewable energy expands in the UK.
Announcing the move, Treasury secretary Dan Tomlinson said CPS, introduced by the Conservative-Lib Dem coalition government in 2013 had “done its job and is no longer fit for purpose”.
“With our Clean Power 2030 mission, we are already reducing our electricity system’s reliance on volatile fossil fuels and we no longer need this additional tax to provide incentives in the system to decarbonise our grid,” he said.
A future Finance Bill would legislate for the removal of CPS, Tomlinson said.
Winterflood analyst Ashley Thomas said: “While the drivers for the CPS removal were clear (it raised about £450m for the Treasury but increased consumer costs by £1.5bn and had achieved its original aim of removing coal off the power system), further policy measures, as recently highlighted by Rachel Reeves, are also likely to be reviewed.”
Our view
Matthew Read, senior analyst at QuotedData, said: “Power price forecasting is a complicated business, with multiple moving parts feeding through to long-term assumptions. Carbon price support is clearly a factor, but its removal was anticipated over the longer term anyway and, while it will have an impact, the effect of this on power price forecasts will not be unique to Greencoat UK Wind and will be an issue for the wider renewable generation sector.
“However, perhaps the greater concern is that this phasing out of CPS seems to have been brought forward due to political pressure. Reform have made no secret of their desire to scrap the CPS and it’s an easy win for the government at a time when power prices have spiked again due to the conflict in the Middle East. The government is clearly alive to this and it appears that further change is coming. Yesterday, while speaking at meetings at the IMF and World Bank, chancellor Rachel Reeves said that that she wants to cut the link between electricity and gas prices in the UK and that her and Ed Miliband, the energy secretary, will set out more details in the coming days on their plans to ensure the wholesale price of electricity is set more often by renewables.
“Coming back to the CPS, on UKW’s numbers, an impact of between 3p and 5p translates into a fall on the current NAV of between 2.3% and 3.8%, which is significant. However, it is worth remembering that there is potential upside to power price forecasts as well. For example, the impacts of unexpected shocks – such as the outbreak of war in the Middle East – are not factored into long term assumptions. Furthermore, these also assume that new generation capacity – for example, new nuclear and renewable generation – is completed on time and on budget. In the case of nuclear, the UK’s record of delivering these to plan is patchy and, in the case of new renewable capacity, lower electricity prices will reduce the incentive to build new capacity at the margin as well.”
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