What Labour’s UK election victory means for green investors

by Admin
What Labour’s UK election victory means for green investors

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A common complaint among UK voters during this year’s general election campaign was that there was little difference between the two major parties. On climate and energy policy, at least, this was unfair.

Rishi Sunak’s Conservative party had made a political point of diluting green policies and emphasising the costs to households of the energy transition. Sir Keir Starmer’s Labour manifesto made low-carbon development an organising principle, with the central ambition of making the UK a “clean energy superpower”.

The election result was conclusive, with Labour winning a crushing majority and the Conservatives suffering their worst ever result. This strikes a contrast with last month’s European parliament elections, and the ongoing election in France, which have been widely seen as reflecting a loss of momentum around green policy.

But how will the UK’s new government try to meet its clean energy targets, and what opportunities will this create for investors?

The key questions around Labour’s green growth strategy

It’s worth noting that Labour’s landslide victory came despite winning little more than a third of the popular vote. Thanks to the quirks of the UK’s electoral system, however, it now has a huge electoral mandate to pursue green goals that are significantly more ambitious than those of the outgoing administration. The answers to the questions below will determine whether Starmer and his team succeed.

Can the new government restore private sector confidence in clean energy policy?

Business sentiment around green investment in the UK has been shaky of late. Sunak’s government has not rolled out large-scale incentives to compete with those offered by the US under the Inflation Reduction Act, and its watering down of green targets last September has further reduced confidence.

Seemingly influenced by the academic Mariana Mazzucato’s advocacy of “mission-driven government” (see our interview here), Starmer’s government has proclaimed clean energy as one of its top two “missions”, alongside economic growth. That framing — coupled with its huge majority — should provide some of the confidence in stable policy that businesses will need to make big investment decisions.

Many such decisions had already been happening under the Conservative government. UK energy transition investment rose 84 per cent last year to $73.9bn, the fourth-highest number for any nation, according to analysts at Bloomberg NEF. But that annual investment figure will need to nearly double, the analysts warned, for the UK to get on track for its net zero goal.

As part of its push to close this gap, Labour will use corporate and financial regulation to put pressure on the private sector, including with a new requirement for financial institutions and big listed companies to publish transition plans aligned with the goals of the Paris Agreement.

Further influence on the financial sector is set to come from the Bank of England, which will have climate considerations restored to its mandate, after these were removed last year by chancellor Jeremy Hunt. Pension fund managers and other long-term investors will be on the lookout for new incentives around domestic infrastructure investment, on which Labour has so far been vague.

But perhaps the most closely watched element of Labour’s plan will be its two new multibillion-pound investment vehicles.

Will Labour’s new investment bodies make an impact?

In February, Labour slashed its vaunted plans for £140bn of green investment and spending over a five-year term, to just £23.7bn. Most of that slimmed-down amount is to be deployed through two new bodies designed to catalyse much larger amounts of private-sector investment.

Great British Energy, which will be capitalised with £8.3bn over the course of the next parliament, will be a publicly owned company funded by a windfall tax on oil and gas producers. It will have a mandate to invest in clean energy technologies and individual projects, as well as supporting local clean energy investment through funding for local authorities and low-cost loans for communities.

The National Wealth Fund, to be injected with £7.3bn, will invest in strategic industries to promote growth and clean energy, with a target of attracting £3 in private investment for every pound deployed. More than a third of its capital will be earmarked for the steel industry, with other target sectors including ports, electric vehicle batteries, carbon capture and green hydrogen.

These new green investment moves come despite Labour plans for an overall reduction in public investment, as it tries to prove its fiscal rigour. It will hope to show that investment smartly targeted on the green transition can have an outsized impact.

Focus on the new investment bodies will be especially strong given the slimming down of Labour’s Warm Homes Plan for domestic insulation and electrification. The budget for that initiative has been slashed from £6bn to just over £1.3bn a year.

Can Labour meet its 2030 power goal?

Labour may have scaled back its green spending plans, but it still has some ambitious decarbonisation targets — most importantly a plan to eliminate emissions from electricity generation by 2030.

This pledge has been met with widespread scepticism. Last year, gas plants provided 32 per cent of UK electricity generation, with a further 1 per cent from coal. Low-carbon generation growth would need to accelerate dramatically to replace most of these fossil fuel plants, with carbon capture technology being deployed at those that remain.

Labour has given a broad picture of how it plans to accelerate the rollout of clean energy, but many details remain to be provided (this report from the Institute for Government gives one outline for how the goal could be reached).

Planning reform will be a key plank — renewable plant developers have been faced with long and burdensome approval processes, with small numbers of local residents often able to block projects. Labour has also pledged to streamline the approval process for nuclear plants, and to work to upgrade an electric transmission grid that it says is an “obstacle” to the rollout of clean power.

Meanwhile, Labour will reinstate the plan to ban the sale of internal combustion engine cars from 2030, after Sunak pushed back that date to 2035. Starmer’s team will hope this policy helps to make the UK a hub for the development and manufacturing of electric vehicles, which accounted for only 16.5 per cent of new car sales last year.

How strong will the political backlash be?

Conservative party strategists appear to have identified climate policy as a potential wedge issue. Sunak’s campaign sought to contrast his “pragmatic” approach to climate policy with a Labour strategy that he claimed would end up imposing costs on households. The defeated party must now decide whether to double down on this line of attack in opposition.

Labour is seeking to rally political support in part through an emphasis on jobs. A “British Jobs Bonus”, with an allocation of up to £500mn per year from 2026, will subsidise job creation by clean energy developers. Labour has also promised to divert a portion of profits from new renewable energy projects towards local communities, to bolster popular support.

Another fiercely contested area is likely to be the oil and gas sector, where the Labour and Conservative platforms were starkly different. Sunak’s government had vowed to “max out” North Sea oil and gas production to support energy security and national income. Starmer’s team have pledged not to issue any new licences, although they accept that North Sea extraction will continue for “decades”.

It’s worth noting that the Liberal Democrats, who won a record 71 seats, had a manifesto even greener than Labour’s, and will push Starmer to raise his low-carbon ambitions still further. Nigel Farage’s rightwing Reform UK, which has called for the UK to scrap its net zero target altogether, entered parliament with four seats.

Smart read

China’s government is currently weighing up its updated strategy for decarbonisation. The outcome will be crucial to the planet’s future, writes Adam Tooze.

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