U.K. Energy Sector Appears Stuck Between A Rock And A Hard Place

As political campaigning for the 2024 general election in the U.K. enters its home stretch, few in the country’s energy sector believe that policymakers waiting in the wings will offer a pragmatic, secure and viable blueprint for the future.

In fact, the election outcome, which will be known on Friday morning, doesn’t inspire much enthusiasm within the sector for either the country’s opposition Labour party led by Kier Starmer, who is widely tipped to form the next administration, or the incumbent Conservative party led by Prime Minister Rishi Sunak.

In many ways, it is hard to find much of a difference between their respective visions for the U.K.’s energy future.

Competing Or Copycat Visions?

Sunak’s Conservatives want to continue granting drilling licences in the ageing North Sea where production peaked almost a quarter of a century ago, a point his government reaffirmed in September. Yet it will continue to subject oil and gas revenues to the country’s so-called windfall tax until March 2029. Including a core levy of 35% on profits, it takes producers’ overall exposure to 75%.

For its part, Starmer’s Labour party wont cancel North Sea drilling licences already granted by the government. But it would not issue fresh ones were it to gain power. Furthermore, the party has also proposed increasing the windfall tax to 78%.

Both are also offering grants and subsidies of varying degrees to support the energy transition to renewables. However, the Conservatives are proposing to pass the burden of this from consumers’ bills to the producers by cutting various green levies.

Meanwhile, the Labour party is offering something that is both bemusing and bewildering in equal measure when it comes to lowering energy bills – the creation of a state-owned GB Energy.

The details, revealed by Starmer in Scotland on May 31, seem to indicate that GB Energy will not be an energy retail company. It will, according to a spokesperson, generate develop, own and operate power assets alongside private firms with an initial capitalization of £8.3 billion ($10.5 billion) over the course of one parliamentary term.

And yes, it will be partly funded “by a windfall tax on oil and gas companies.” For good measure, the unconvincing pitch, which is highly unlikely to directly impact consumers’ bills, was launched by Starmer brandishing his green credentials whilst having flown in on a private jet, after criticizing his opponent for using one just days earlier.

Not Listening To The Right People

There is an overriding frustration in the industry that the country’s two main political protagonists are listening to more to social media quips and less to what industry experts say.

Several, mainly Labour party members of parliament, including Starmer himself, have in the past praised disruptions caused by protest groups like Extinction Rebellion, following social media trends. Although, of late, Starmer has regularly criticized such environmental protest groups for inconveniencing consumers.

Your correspondent found severe anxiety about the future in Aberdeen, Scotland – the U.K.’s energy capital on a recent pre-election visit. Industry leaders complained about their genuine concerns being ignored.

Many said Labour’s proposed hiking of the windfall tax further and general uncertainty might just tip the industry over the edge. Paradoxically, this may have a knock on effect on expansion of the country’s renewable energy footprint too.

U.K. industry body Offshore Energies UK (OEUK) said: “The industry is being taxed on windfall profits which no longer exist and currently faces a fourth round of fiscal change and turmoil in less than two years, making it impossible to plan investment for the energy transition and the path to net zero.”

That too after a progressive deterioration in business conditions in recent years. John Heiton, Chief Executive Officer of OEG Energy, a cross-sector renewable to traditional energy outsourcing services provider, said the operating climate has been worsening for nearly a decade with no end to the turmoil in sight.

“We take no political position of our own but political and policy uncertainty going all the way back to the Scottish Referendum [in 2014] continues to create challenges for our business.

“First came a political schism in Scotland, then Brexit [in 2016] and now punitive taxation on traditional energy. While the immediate headline impact of such events can be mitigated from a business perspective, making a call on future investment has become ever more challenging.”

Wider energy poverty could be the unintended outcome of an overt focus on promoting or curtailing one or more aspect of the U.K. energy mix at the expense of the other, said Christopher Hudson, President of dmgevents, an organizer of over 30 annual global energy events.

“It becomes problematic if politicians get too caught up in some of the echo chambers that exist on social media and take them to be a reflection of the wider world. We see some of it in the U.K. and it is by no means exclusive to the country.

“A low-to-zero carbon future is on the horizon but traditional energy will continue to play a critical role in our wider energy mix for decades alongside renewables. That reality should not be blurred by social media hectoring about what people and politicians should or should not do.”

An Unwelcoming Investment Climate

Many complain of an unwelcoming investment climate, and not just of being outside the echo chambers that have the government’s and the opposition party’s ears. That looks unlikely to improve post-election and is already beginning to bite.

As the leading lobby group of the U.K.’s energy capital – Aberdeen and Grampian Chamber of Commerce – noted: “There is evidence of investors walking away from energy deals with some showing open dissent towards the U.K. due to heavy taxation. If such a sentiment gathers pace, then the 1,000 jobs we have already lost to the windfall tax could be a drop in the ocean compared to what is to come.”

Jim Johnson, CEO of Hunting (LON: HTG), a FTSE 250 global subsea to space precision engineering group, echoed that sentiment, adding that the U.K. is heading down a “suicidal path” of energy policies, both those in place and likely to follow, that seemingly lack any sense of realism.

“The windfall tax is a bad idea that is past its sell by date. But instead it has been extended and may be expanded by a future government. It risks destabilizing the U.K’s energy investment ecosystem, which from our perspective is not very welcoming as it currently stands.”

Johnson also reiterated his previous sentiments: “Our shares trade in a domestic environment in the U.K. where a perception has been created that the public just hates oil and gas, which may or may not be true, but a section of the media takes it as gospel.

“Consequently, the political classes appear to be lacking a clear strategy having paid too much attention to social media and in favor of over-regulating businesses and levying taxes that are counterproductive.”

Johnson is not alone in holding those views. None other than FTSE 100 energy giant Shell (LON: SHEL) saw its CEO Wael Sawan express similar sentiments in April.

He has also previously contrasted how Shell felt more welcome in the U.S. business circles compared to the U.K. where his company, despite its best efforts, continues to be undervalued.

This should be a source of major anxiety for any incoming government. Shell accounts for 10% of the entire value of the FTSE 100. It is also the biggest of only four companies on the country’s blue-chip index to be valued above the £100 billion threshold. AstraZeneca, HSBC and Unilver are the other three.

However, neither of the U.K.’s two main parties have directly addressed or even mentioned assuaging such concerns on the campaign trail. In fact, for the entirety of the election campaign, which is drawing to a close on Thursday, frankness about the energy sustainability trilemma (sustainability, security and affordability) – i.e., how focusing on one aspect at the cost of the other could have serious consequences – has been missing.

There is little to differentiate between the regressive stances of both of the country’s main political parties, with policies that appear to have been written on the back of a cigarette packet (or perhaps a social media post), as the Brits often joke. It is no laughing matter, however, that U.K. Energy Inc. finds itself stuck between a rock and a hard place come what may.