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Will the Electricity Generator Levy hit SSE and RWE share prices?

The energy crisis has underlined the need to shift away from fossil fuels to low carbon sources and infrastructure. However, the bosses of SSE and RWE say that a new levy on electricity generators could pose a risk to investment in renewables.

- The UK government has announced a 45% levy on electricity generators.

- SSE and RWE bosses believe the move will impact net zero and low carbon investments.

- The two stocks are held by the Goldman Sachs Bloomberg Clean Energy Equity ETF.

Energy companies including SSE [SSE.L] and RWE [RWE.DE] are reviewing the impact of the UK government’s Electricity Generator Levy, announced in the Autumn Statement.

The levy is a 45% tax on “extraordinary returns” from low carbon UK electricity generation, according to a government statement. “Extraordinary returns” are defined as electricity sold at an average price of more than £75 per megawatt hour (MWh) — roughly 1.5 times the average price of electricity over the past decade.

The levy has attracted criticism. “In times of national crisis, everyone should be playing their part. I’m deeply disappointed that renewables have been singled out — it seems it’s a recession made by gas, but a recovery to be paid for by renewables,” Keith Anderson, CEO of Scottish Power, a subsidiary of Spanish energy giant Iberdrola [IBE.MC], said in a statement.

“To say that imposing a 45% windfall tax on some areas of our business … will not impact investment is nonsense,” Alistair Phillips-Davies, CEO of SSE, told BBC Radio 5 Live.

Nevertheless, the SSE share price is up 9.8% in the past month and up 8.3% year-to-date as of 28 November’s market close.

SSE invests four times profit in clean energy

A few days before the government announced the Electricity Generator Levy, SSE had declared its H1 2023 earnings. Pre-tax profits had jumped 221% to £559m in the six months to the end of September. Post-tax profit soared 305% from £111m in H1 2022 to £450m.

Operating profit in SSE’s renewable business decreased marginally in H1 2023 year-over-year to £22.5m, partly due to “unfavourable weather” conditions'. For comparison, the operating profit from transmission was £208m, distribution £175m, and £100m thermal.

SSE tried to ease any concern about its mammoth profits by pointing out it had invested £1.7bn, almost four times its net income.

“This has enabled us to invest far more than we earn — building and operating the clean homegrown energy infrastructure that will provide a sustainable solution to the current energy crisis,” said Phillips-Davies in prepared remarks.

The CEO even gave his blessing to levies on profits as long as they “are fair and reasonable”, adding that the UK has “created an amazing environment for investors… it’s critical we don’t endanger that”.

Levy undermines green investment

The structure of the Electricity Generator Levy leaves much to be desired, though, say energy experts.

Scottish Power’s Anderson said in his statement that imposing the levy, which will come into force in January 2023, through March 2028, “creates a five-year long corridor of uncertainty for investors — hitting the clean energy projects we need more of to wean us off gas dependency and decarbonise”.

SSE announced at the end of 2021 that it planned to invest £12.5bn by 2026 in low carbon infrastructure, an increase of 65% on what it had previously pledged. Some of this investment could now be under threat as a result of the Electricity Generator Levy. Phillips-Davies stressed in his statement that it was important that the company had “all the money we can to develop all the opportunities we can so we can invest our way out [of] this crisis for people”.

The UK chair of RWE, Tom Glover, delivered just as strong a rebuke, saying in a statement seen by Bloomberg, that the levy undermined investor confidence in renewables. It’ll be “harder for the UK to deliver its net-zero decarbonisation commitments,” Glover warned. 

Funds in focus: First Trust Global Wind Energy ETF

The Goldman Sachs Bloomberg Clean Energy Equity ETF [GCLN] holds both SSE and RWE, allocating them weightings of 1.40% and 0.21% respectively as of 25 November. The fund is down 3.67% since 10 February, when the fund launched, but up 6.2% in the past month.

Both stocks are also held by the First Trust Global Wind Energy ETF [FAN]. RWE currently has a 2.37% weighting and SSE a 2.23% weighting. The fund is down 15.2% year-to-date, but up 6.5% in the past month.

SSE is also held by the iShares MSCI United Kingdom ETF [EWU] and has a weighting of 0.99%. The fund is down 5.6% year-to-date, but up 8.5% in the past month to 28 November.

Disclaimer Past performance is not a reliable indicator of future results.

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