15th Nov 2022 16:35
(Alliance News) - Market concern for a windfall tax imposed on Drax Group PLC is "overdone", according to analysts at RBC, as investors brace for the latest UK fiscal policy announcement.
It is less than 48 hours before Chancellor Jeremy Hunt outlines plans to boost UK government coffers.
Hunt is considering increasing the windfall tax on oil and gas giants from 25% to 35% while also expanding the levy to electricity generators, such as Drax, PA reported.
In October, the Yorkshire-based firm said it would work with the UK government on its Energy Prices Bill before the measures are put in place in 2023. The government, at that point led by former prime minister Liz Truss, introduced the Energy Prices Bill.
The measures would have seen renewable energy generators and nuclear power plants have revenue capped under a new plan to ensure companies are not benefiting from record-high energy prices.
"We have almost gone full circle on government intervention into electricity generation markets this year with windfall taxes morphing into return of capital for contracts-for-difference swaps and then into price caps. We now expect windfall taxes to be announced as part of the UK budget later this week," RBC said.
RBC estimates a windfall tax rate of 35%.
Shares in Drax have fallen 6.3% since the start of last month, as traders fret over the threat of possible levies imposed on the company. Shares were up 2.7% at 563.50 pence each in London on Tuesday afternoon.
RBC said recent share price weakness has been overstated.
RBC added: "We now assume 35% additional tax on generation for just over five years resulting in GBP1.5 billion additional tax for Drax. This may be an overly aggressive assumption as the government may want to positively discriminate on renewable electricity versus oil & gas, and we also don't allow for capex offsets in our estimates."
Drax's balance sheet as the resilience to cope with a windfall tax hit, and also progress capital expenditure plans too, RBC believes.
"Even under our windfall tax assumptions we see the GBP3 billion capex plans as fully funded under the current balance sheet," RBC explained.
While investors have been wary of the windfall tax possibility, the eventual imposition of one would at least give shareholders "clarity".
"Improved clarity on cashflows should allow investors to once more focus on Drax's future growth options around [bioenergy with carbon capture and storage] (both in the UK and internationally), new pumped storage capacity at Cruachan and continued expansion of its upstream pellet facilities," RBC added.
Cruachan is a hydroelectric power station owned by Drax in Argyll and Bute, Scotland.
By Eric Cunha; [email protected]
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