The ongoing tensions in Ukraine have had a knock-on effect on European gas prices today, with speculation that this could lead to an increase in UK energy prices.
Analysts at Liberum say that if the rise in European gas prices persists, this would be positive for the UK generators, especially those exposed to renewables and coal.
While the higher gas price could benefit UK utilities' generation division, it may pose some pressure on the supply business if they struggle put through the higher commodity prices onto customer bills before the General Election in 2015.
On balance, we prefer Drax and SSE as a hedge for such an event for their more limited exposure to supply (Drax) and higher renewables and coal exposure (Drax and SSE). In addition, the situation in the Ukraine may remind UK politicians of the benefits of having large, diverse energy companies like SSE and Centrica.
Russia transports its gas to Europe via a pipeline in Ukraine, but is threatening to revoke its price discount to the troubled country, potentially putting supplies in jeopardy.
FTSE 100-listed energy firms Centrica and SSE have seen their share prices slump today. Centrica, which owns British Gas, saw a greater fall to its share price, due to the business’ weighting towards gas.
In contrast, coal-fired power generator Drax’s share price was relatively flat, due to its lack of exposure to the gas market.