Seven key steps the UK’s Labour government is taking on net zero – and investor responses
The UK’s Labour government didn’t waste time attempting to turn the tide on the country’s energy transition, as the King’s Speech today highlighted. But will it be enough to convince investors?
To an international observer, the King’s Speech, an annual ritual where the UK’s monarch King Charles travels to Westminster by carriage to read out the government’s new legislative priorities might sound like a strange spectacle. The procedure involves slamming doors and a re-enactment of a hostage-taking process, historically designed to ensure the King’s safe return to the castle.
Only 24 hours earlier, the monarch had awarded a royal title to a goat in Guernsey, which to an outsider might be an equally archaic procedure. But there are some good reasons why investors might want to pay closer attention to today’s proceedings and Labour’s wider agenda on net zero.
1) The National Wealth Fund Bill
The new government has committed backing the funds with £7.3bn in public money with the aim of attracting three times the amount in institutional investments. The fund’s taskforce includes senior representatives of the investment industry such as Brunel CIO David Vickers and USS CEO Carol Young.
The funds will be deployed over the next five years and will target investments in areas with significant decarbonisation opportunities and funding gaps, including green steel production, gigafactories, green hydrogen, and port investments.
It includes a prominent role for the UK’s state-owned Infrastructure Bank which has been tasked with disbursing the funds and a reform of the British Business Bank, which is meant to help investors build a pipeline of transition investments.
The initiative is welcomed by Chris Cummings, CEO of the Investment Association who said that enshrining the National Wealth Fund in legislation was “a clear signal” from the government of their intent to mobilise much needed capital for green investments.
2) The Great British Energy Bill
The new government has also launched a new public energy company, GB Energy, which will be based in Scotland and is set to develop, own and operate energy assets. The company is capitalised with £8.3bn in public funds and aims to work with the private sector in funding the UK’s energy transition.
The move was broadly welcomed by the green energy industry. George Morrison, CEO of Aquaterra Energy, an offshore wind provider, commented: "The £7bn investment in GB Energy is a pivotal step toward reinforcing the UK’s leadership in the energy transition. With Labour's manifesto commitments to quadrupling offshore wind capacity by 2030, earmarking £1bn for carbon capture and storage, and £500m for green hydrogen, we can advance crucial sectors."
But he also warned: "It is imperative to consider project timelines and advances in innovation and technology required to meet ambitious 2030 targets, particularly in green hydrogen where there may be a chicken-and-egg scenario in terms of production capacity vs demand.”
3) A push for Sustainable Aviation Fuels (SAFs)
The government has also introduced the somewhat clunkily named Revenue Support Mechanism Bill for sustainable aviation fuels, aimed at ensuring an expansion of the sustainable aviation fuel sector in the UK by essentially subsidising this new sector. As previously reported on Net Zero Investor, the sector is beginning to develop from venture capital fundraising towards targeting follow-on capital from long-term investors.
The creation of a revenue certainty mechanism on sustainable aviation fuels has been advocated among others by Aviva Investors, which published a Policy Roadmap on “Boosting low-carbon investment in the UK.”
4) Drive towards devolution
The new government also wants to place more power in the hands of mayors of combined authorities, a move which does not immediately seem linked to the energy transition but could have a profound impact, as Bruno Gardner, head of Climate Change and Nature at UK Life Insurer Phoenix, believes. Gardner said: “In line with our recommendation for government to focus on unlocking regional investment in net zero, devolving greater power to metro mayors and local authorities in energy, transportation and planning will materially help them deliver the net zero transition in their regions.
“Phoenix Group stands ready to play its part in accelerating the net zero transition across the country and calls for regions to develop place-based local transition plans,” he pledged.
5) Planning and Infrastructure Bill
The Labour government wants to overhaul existing planning restrictions, a measure which is in large part aimed at encouraging the construction of new houses but could also benefit the development of renewable energy infrastructure. Even prior to passing the bill, the government has scrapped existing planning restrictions on onshore wind, as reported on Net Zero Investor.
Joe Dharampal Hornby, head of Public Affairs at UKSIF, the UK sustainable finance trade body, welcomed the removal of the de facto planning ban on onshore wind but said it was “only part of the solution.”
“We know funds are looking to invest in Britain's sustainable future, but to do so, they need streamlined planning processes, grid upgrades that mean they can plug in their projects, and long-term certainty on pricing mechanisms, such as Contracts for Difference. Targeted capital aimed at de-risking projects in areas facing constraint – through the likes of GB Energy – alongside this wider economy reform, can position the UK as a global leader in clean energy investment and innovation,” he stressed.
6) Scrapping of new oil and gas licences in the North Sea
A measure which has not been explicitly mentioned in the King's Speech but should nevertheless be closely followed by investors is the new government’s decision to cease issuing new licences for North Sea Oil and Gas exploration. This effectively reverses a new policy introduced by the Tory government in 2023 which foresaw an annual licensing round for fossil fuel exploration in the North Sea.
However, the government confirmed that it does not intend to reverse licences issued last year. Some of the main investors in these new projects are Shell, Equinor, Total and BP.
7) Cease backing of a new coal mine in Cumbria
Another important signal to the UK’s energy transition is an announcement by lawyers acting for Angela Rayner, the newly appointed Secretary of State for Housing, Communities and Local Government, that a new coal mine which was due to be built in Cumbria has been erroneously granted planning permission. The decision is still being fought out at the UK’s High Court, which only last week rejected a planning permission for a new oil production facility in Surrey. Both cases have been brought forward by campaign group Friends of the Earth.
While the court's decision on the mine in Cumbria is still outstanding, it has already lost the backing of investors. Funding for the West Cumbria Coal Mine, which is owned by private equity firm EMR Capital, has dried up over the past 18 months, indicating an increased reluctance by investors to back new coal mining projects.
A common feature across these new policy reforms were borrowing constraints. With Central Bank rates remaining at the highest levels since the 2008 crisis, the new government has limited headroom for additional borrowing and is keen to avoid a repeat of the bond market meltdown seen under the Liz Truss government. But early market indicators suggest that investors are ready to cut it some slack. Yields on 2-year UK government bonds have dipped below the critical 4% mark and the Pound was trading at 1.31 against the Dollar, a significant improvement from the near parity levels seen two years ago. A drop in medium-term borrowing costs could offer some much needed breathing space for the new government.
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