Investors eye energy transition opportunities in the wake of Labour landslide

Ed Miliband didn’t mince his words. The newly appointed energy secretary promised in a recent interview with the national newspaper The Guardian that the UK would fill the vacuum of climate leadership on the world stage and made a reversal of the ban on onshore wind developments one of his top priorities. By the end of the decade, the Labour government plans to double onshore wind, triple solar power and quadruple offshore wind capacity. 

Climate-conscious investors have therefore expressed optimism that the UK’s shift to the political centre could provide a much-needed headwind for the energy transition. While the UK was the first major economy to put its net zero pledges into law, outgoing prime minister Rishi Sunak has since staged a series of U-turns, from the opening of new oil and gas licences in the North Sea.

Patrick Suckling, managing director at Pollination, a climate and nature advisory and investment firm, believes the election results could trigger significant progress on the road to net zero: “This landslide win provides the strongest possible mandate for change, where the incoming government has already made clear that one of the most transformative changes will be to end the backsliding on the UK’s journey to net zero, not least powering the nation with clean renewable energy. With over 90 per cent of global GDP committed to this journey, that is where the UK’s future lies,” he stressed.

Focus on continuity

But despite the use of the term “change” in a campaign slogan, the Labour party has already cut its green spending pledges in half from £28bn per annum to £15bn, of which only a third would be new money. Focusing on offering investors continuity, the Labour party said that it would not retract the recent oil and gas licences in the North Sea but would no longer offer new licences.

At the same time, it plans to significantly expand off- and onshore wind capacity by the end of the decade, which is in part to be funded through continued windfall taxes on profits from oil and gas companies which would be channelled into a new £8bn green energy investment vehicle.

A key challenge for the incoming Labour government will be the rise in borrowing costs. With yields on long-dated UK government debt in excess of 4%, it has limited headroom for additional borrowing. Initial bond market reactions to the election results suggest that investors are willing to cut the incoming government some slack, with yields on long-dated UK government debt initially dropping by 2 basis points before stabilising through the day.

Hitting the ground running

UKSIF, the UK’s Sustainable Finance and Investment Association, said that the new government is keen to be seen as hitting the ground running with a new cabinet and ministers to be appointed over the weekend and the first King’s Speech scheduled for 17th July. In the UK, the King’s Speech is the government’s opportunity to announce new policies. UKSIF predicts that this could include an Energy Independence Bill, as well as legislation to establish GB Energy and the National Wealth Fund.

But the investment industry body also warns of policy gaps as it remains unclear how Labour’s plan for a publicly owned clean energy company – Great British Energy – and the National Wealth Fund would interact with existing institutions such as the UK Infrastructure Bank (UKIB). “Broadly speaking, it is not guaranteed that we will see a clear picture emerge quickly, particularly in terms of timings for the delivery of specific initiatives,” UKSIF warned.

Need for investment

The Labour party plans to derive much of the capital needed to fund the energy transition from investors, rather than taking on additional borrowing. It announced the launch of a new National Wealth Fund Taskforce earlier this year with representatives of some of the country’s largest pension funds and insurers, including USS, Brunel Pension Partnership, Aviva and Legal & General advising the incoming government.

Phoenix Group, the UK’s largest long-term savings and retirement business, today recommends three key policy interventions to the new Labour government in order to catalyse the net zero transition at regional and local levels.

Bruno Gardner, head of Climate Change and Nature at Phoenix Group, said that there was a broad willingness among investors to back the transition: “We believe that an incoming government aiming to catalyse investment in net zero at regional and local levels would be highly advantageous to the UK. Phoenix Group stands ready to play its part in accelerating the net zero transition across the country.”

Phoenix, one of the UK’s largest life insurers, has called on the incoming government to create an investor advisory body to work with the Department of Energy Security and Net Zero (DESNZ) to collectively build the skills and capacity in local authorities needed to build an investible deal pipeline of climate solutions.

It also suggests that the new government should establish an Office for Net Zero Delivery tasked with coordinating departments to ensure delivery against the energy transition plan.

Moreover, in a recent policy paper, "Charting the UK’s Net Zero Future: Policy Recommendations to Unlock Investment," the group recommended that the new government endorses the Local Area Energy Plan Guidance as the national framework for place-based whole energy system decarbonisation planning. This, in turn, could help regions to develop consistent local transition plans, the group said.