JP Morgan has recommended that investors are ‘oveRWE (ETR:RWE)ight’ in UK energy firms Centrica PLC (LSE:CNA) and SSE PLC (LSE:SSE). This comes amid ongoing discussions about power market reform in Europe, sparked by the energy crisis that arose due to Russia’s invasion of Ukraine.
With consumers feeling the pressure of higher electricity prices linked to higher gas prices, governments have implemented emergency interventions to shield them from the worst of the price increases.
However, politicians are now looking to make energy and electricity markets more resilient when these emergency tools expire. The aim is to shield consumers from higher prices and weaken the link between electricity and gas while accelerating the deployment of renewable capacity.
JP Morgan predicts that the market will move towards more long-term contracting, which should give investors much-needed visibility amidst volatile market prices and uncertainty around market interventions.
However, some key factors of any potential reform remain uncertain, such as the volumes impacted, the duration of contracts, timings, and limitations on free market pricing. The bank believes that the European Commission’s proposal on March 16 will underscore that any compromise in the EU can only imply an evolution rather than a revolution vs the current model.
While there may be an increase in perceived uncertainty in the near term, JP Morgan views any subsequent weakness as a buying opportunity.
Once details of the electricity market design are known, a shift towards long-term contracting should drive a rerating of the utility sector, with attention shifting to the resilient relative earnings momentum.
The bank’s top picks for investors are RWE, Engie, Enel, EDP, Centrica, and SSE, all of which are ‘overweight’.
On the other hand, it suggests avoiding rich valuations in regulated names such as Redeia and Enagas.
