Morgan Stanley anticipates that investors will react positively to the UK government's recent changes to electricity pricing rules, a view that extends across listed power generators such as SSE, RWE, Orsted, Centrica and Drax. The investment bank specifically recommends buying SSE and RWE after noting that their share prices declined on Friday.
The most significant policy change is an increase in the Electricity Generator Levy (EGL) - commonly referred to as the windfall tax - from 45% to 55%, effective July 1, 2026. The government has left the levy reference price unchanged at 75 per megawatt-hour in 2023 real terms, which Morgan Stanley notes equates to 82.61 per megawatt-hour for 2026 and an estimated 84.43 for 2027.
Despite the higher levy rate, Morgan Stanley's analysis points to only marginal earnings per share (EPS) impacts for companies with exposure to the levy. For fiscal year 2027 the bank calculates EPS changes of approximately negative 0.1% to negative 0.3% for exposed stocks. The small effect is driven by two factors the bank highlights: the current shape of baseload forward curves and the extent to which merchant exposure at these companies is already hedged at lower prices.
On forward prices, Morgan Stanley cites baseload UK forward curve levels of 95 per megawatt-hour for 2026, while the baseload forward curve for 2027 sits at 71 per megawatt-hour - below the reference price above which the levy applies. The bank emphasises that much of the merchant exposure likely to be affected is already covered by hedges agreed at lower price levels, which reduces the incremental burden from the increased levy rate.
Policy design elements remain in development. The government plans to publish further details later in 2026 about a 2027 auction that would allow asset owners holding legacy Renewable Obligation Certificate (ROC) contracts to opt into Contract for Difference (CfD) arrangements on a voluntary basis. Morgan Stanley provides estimated ROC volumes for 2027 by company: about 6 terawatt-hours (TWh) for RWE, 6.5 TWh for SSE, 2.4 TWh for Orsted and 3 TWh for Drax.
Another policy change announced is the slated removal of the 18 per ton Carbon Price Support from April 1, 2028. Morgan Stanley's messaging frames the combination of these measures and the current hedging and forward price environment as reasons why earnings sensitivity for the affected generators should remain low in the near term.
While Morgan Stanley expects a constructive market reaction, the bank's analysis is explicit about the limited EPS impact in its fiscal 2027 estimates and notes outstanding policy details to be clarified later in 2026.