Centrica, EDF Face Rising Windfall Atomic Tax Risk, Analysts Say

Centrica Plc and Electricite de France SA are more likely to face windfall taxes after the U.K.’s Liberal Democrat party called for trimming returns from nuclear generation, analysts say.

The party, the junior partner in Prime Minister David Cameron’s coalition government, yesterday proposed a windfall tax on nuclear power to help “fuel-poor” households. The measure would attempt to claw back profit arising from the adoption of a carbon floor price from April 2013.

EDF, the U.K.’s largest nuclear power generator, may earn as much as 154 million pounds ($242 million) of “extra profit” as a result of a tax on carbon-dioxide emissions from 2013, according to Citigroup Inc. The Treasury imposed the tax of 4.94 pounds per metric ton of emissions from fossil-fueled plants in its March budget, effectively raising the price EDF can charge for nuclear power, which emits less greenhouse gas. Centrica controls 20 percent of EDF’s eight reactors.

“It is difficult to come up with a counter argument to the ‘windfall’ tax,” Lakis Athanasiou, an analyst at Evolution Securities Ltd., said in a note to investors today. While passage of the measure doesn’t bind Energy Secretary Chris Huhne to adopting a tariff, “under the right circumstances it could get legs.”

Risk ‘Clearly Rising’

An additional carbon tax of 11 pounds per ton would boost the electricity price by about 5 pounds per megawatt hour in 2015, Athanasiou said. This would leave EDF and Centrica with a 210 million pound tax charge, he said. The charge could rise to about 471 million pounds by 2020, the analyst said. The total tax burden between 2013 and 2020 could exceed 2 billion pounds.

“Regulatory and political risk for U.K. utilities is clearly rising,” UniCredit SpA analyst Scott Phillips said in a note to investors today. “The rhetoric on the supply companies meanwhile has been getting tougher for a while, with the government and Ofgem taking a very critical look at supply margins.”

A proposed windfall tax is likely to meet resistance as it counteracts the carbon floor and may deter investment in new reactors, Tom Burke, a co-founder of Brussels-based environmental lobby E3G, said by e-mail. EDF has plans to build four new reactors in Britain with its first at Hinkley Point in southwest England coming online by 2018.

The carbon tax “is part of the deal to get new nuclear,” Burke said. “It is a sweet deal as long as no-one pays too much attention: the nuclear industry gets a slug of money to help cover its construction risk, the Treasury gets a lot more money from a stealth tax and environmentalists take the blame for the price increases.”

Other companies considering building nuclear power stations in the U.K. include RWE AG and EON AG, as well as Iberdrola SA and Scottish & Southern Energy Plc. Britain can currently get about 20 percent of its power from its 10 nuclear stations, five of which are due to shut over the next decade.

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