U.K. CO2 Tax May Fail to Reduce Power From Coal, Evolution Says

Britain’s new tax on carbon-dioxide may fail to reduce power generation from coal, according to Evolution Securities.

Gas prices have been trading at about the coal equivalence price, where the cost to produce power using the two fuels is comparable, and are likely to continue to do so, Lakis Athanasiou, a London-based Evolution Securities analyst, said today by telephone.

“Summer natural gas prices are around the U.K. coal equivalence price as far ahead as 2014,” Athanasiou said. “That’s a visible pricing point that buyers and sellers are clustering around on the forward curves.”

Chancellor George Osborne fixed March 23 the carbon tax at 4.94 pounds ($7.94) a metric ton from 2013, to raise revenue and prompt the use of cleaner-burning fuels for power generation. Drax Group Plc (DRX), owner of Britain’s largest coal-fed plant, plummeted as much as 8 percent after the announcement on concern the profitability of coal-fired plants, or dark green spread, would fall.

“The negative reaction of Drax’s share price is wrong,” Athanasiou said. “We expect that the share price will come back up when we see the impacts of the higher CO2 prices feeding through to electricity and gas prices, shoring up the hit on the dark green spread.”

Drax rose 7 pence, or 1.9 percent, to 379 pence as of 11:30 a.m in London. Athanasiou has a neutral recommendation for Drax and a price target of 410 pence.

To contact the reporters on this story: Catherine Airlie in London at cairlie@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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