Market Report: Budget fears spread as investors turn off Drax

Fallers were in the minority yesterday, but Drax was one of them as fears were raised that the power station operator could face a large blow over carbon permits in tomorrow's Budget.

Last December the Government revealed plans to introduce a floor price for carbon emissions which would eventually rise to £70 a ton by 2030, and a decision on the proposals – including how it would be structured – is expected to be announced on Wednesday.

Warning that "there is no good outcome here for Drax", and noting the current carbon price is below £15 a ton, Angelos Anastasiou, an analyst at Investec, said he sees the decision "as varying degrees of bad news".

"The debate is on the path," said Mr Anastasiou, who added that the "toughest case is for a straight-line increase to £70 a ton from current levels".

He also pointed out that in 2013, as part of the EU emissions trading scheme, "fossil fuel generators will cease to get free carbon allocations". Once this disappears, the analyst calculated, if Drax produces the same amount of carbon as in 2010 "each £5 increase in the carbon price would lead to an increased cost of £110m".

There was some hope, he said, in the group's "plans to convert one, and then potentially more, of its six units to dedicated biomass burning [which] could extricate it from this carbon conundrum, but it does count on significant subsidies... coming from the Government".

Dipping 4.6p to 415.4p, Drax was also hit by JP Morgan Cazenove reiterating its "underweight" advice, saying that although rising power prices in the UK have helped its short-term outlook, things appear more challenging in the longer term.

The rest of the market, however, maintained its rally as worries over Japan's nuclear situation continued to recede. The FTSE 100 climbed 67.96 points to 5,786.09 and the FTSE 250 closed 165.42 higher at 11,511.24 despite – with air strikes in Libya ongoing – the price of oil rising.

Takeover news from across the Atlantic was having an effect following Sunday's announcement from AT&T that it is spending $39bn (£24bn) on T-Mobile USA. Vodafone – which is involved in the US through its joint venture Verizon Wireless – advanced 6.05p to 176p, although not everyone saw it as good news for the telecoms group.

Deutsche Bank said that, although it would usually view "this substantial consolidation event as unambiguously positive", it could prompt Verizon to make acquisitions itself, potentially delaying dividend payments to Vodafone.

Investec's Morten Singleton, however, said the deal "sidelines [Verizon Wireless's] major US competitors in a focus on integration and synergy extraction", and added that a possible merger between Vodafone and Verizon has now been made a "little more likely".

Elsewhere, Weir was driven up 73p to 1,708p by Credit Suisse giving it an "outperform" rating, with the broker saying that despite its recent under-performance it "remains a strong organic growth story". The rest of the engineering sector was also doing well, with Invensys – around which vague bid speculation has recently been seen yet again – taking top spot after moving 17.1p to 353.2p.



At the opposite end, Essar Energy plummeted 34.6p to 440.4p following its first full-year results since it listed last year. The energy group's earnings did beat expectations, but it also revealed three of its power stations have been delayed by three months because of recent heavy rain in India.

On the FTSE 250, there was a much better reaction to Regus's update, with the serviced office provider shooting up 16.1p to 116.6p following the release of its preliminary figures. The company enjoyed the jump despite its earnings falling in 2010 by more than two-thirds, as it predicted it would see its revenue grow in the year ahead. Punch Taverns was lifted 4.6p to 73.55p after responding to reports regarding the future of its spirits business. The group said it had thought about demerging the unit as part of its strategic review, and said it would announce its conclusions today.

Also issuing a statement was Gem Diamonds, which – following recent speculation – confirmed it is currently in preliminary discussions with Lucara Diamond over a potential merger, and investors bumped it up 14.2p to 284.2p.



On the Alternative Investment Market, Rockhopper spurted up 70.75p to 287.75p after the explorer said its Falkland Islands oil well "is highly likely to prove commercially viable". The news also helped other groups operating in the area, including Desire Petroleum, which increased 3.25p to 40p.

Meanwhile, on the small-cap index, the struggling retailer JJB Sports added 12p to finish at 26p ahead of today's crucial vote on its rescue plan. Over the weekend it emerged that Hammerson, one of the chain's biggest landlords, will support its proposals, which include the potential closure of as many as 89 of its shops.

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