The UK government's announcement of two interventions intended to ease the influence of gas on electricity bills has been judged inadequate by Citi Research, which described the policy package as a "missed opportunity" that is unlikely to deliver substantive relief for households or industry.
The measures unveiled on April 21 comprise a higher tax burden on generators and a voluntary scheme to allow producers to move to fixed-price arrangements. Specifically, the Electricity Generator Levy (EGL) will rise from 45% to 55%, effective July 1, and the levy will be extended beyond its previously scheduled expiry in 2028.
In parallel, the government said it would offer voluntary wholesale Contracts for Difference (CfDs) to allow generators to switch onto fixed-price deals. Citi noted that the announcement contained no specifics on key design elements - pricing, contract duration or which technologies would qualify - a shortfall it highlighted in a flash note titled "UK power market intervention underwhelms."
Citi pinpointed a central weakness in the package: the decision to leave the EGL threshold unchanged at £75/MWh (real, 2023). The broker argued that without lowering that threshold, simply increasing the levy rate is "unlikely to have a material impact on power pricing or incentivize delinking power from gas."
On the proposed voluntary CfD mechanism, Citi said the combination of a higher EGL rate and an unchanged threshold "largely renders the policy toothless given hedged/forward power price levels and will be inadequate to 'incentivise' industry to move to new CfDs." The firm predicted this dynamic would result in "limited take up of new fixed-price contracts," leaving the historic link between power and gas prices essentially intact.
Framing the missed opportunity more broadly, Citi suggested that a bolder effort to break the power-gas price link could have tackled several macroeconomic and structural issues: crippling energy costs, lower inflation and interest rates, accelerated electrification, support for key industries and reindustrialization, and ultimately stronger UK growth. Instead, the broker said, the announced measures amount to a "transfer of value from industry to Treasury (not consumers)."
The government, for its part, said it will consult on the CfD design - including levels, duration, sunset clauses and eligible technologies - and must reconcile the details with the AR7 power price assumption of £32/MWh for 2031/32.
On equity implications, Citi retained its Sell rating on SSE PLC with a target price of 2,036p, compared with a closing price of £25.84 on April 21. The broker kept a Buy rating on Centrica Plc with a target price of 218p, versus a closing price of £2.07. Citi noted both stocks partially recovered losses sustained on Friday following the policy announcement.
The analysts flagged different company-specific risks and opportunities: SSE faces "downside consensus earnings risk from capacity market auction and removal of £18/t carbon top up," while Centrica presents "upside risk to consensus from investment opportunities."
Citi's valuation assumptions are disclosed for both names. Centrica is appraised on a sum-of-the-parts basis assuming long-term power prices of £65/MWh and gas at 65p/therm, with a weighted average cost of capital of approximately 8.5%. SSE is valued on the same sum-of-the-parts basis with WACC assumptions of approximately 6.5% for renewables and approximately 4% for regulated units.
Takeaway - Citi's assessment is that the government's package, as currently designed, is unlikely to meaningfully weaken the link between gas and power prices or to provide broad consumer relief. The combination of an increased EGL rate without a reduced threshold, plus a voluntary CfD framework lacking detailed design, points to limited industry uptake and continued price coupling.