Party pledges spark utility fears

Following the party conferences and the recent political and economic turmoil, Utility Week policy correspondent David Blacks asks whether utilities have more to fear from the policies of the Conservatives or Labour.

A week is a long time in politics, ex-prime minister Harold Wilson famously quipped.

If that’s the case, then the last month in British politics has felt like an aeon. This period, during which both Labour and the Conservatives have held their annual conferences, has seen a dramatic reversal in their fortunes since the last such gatherings in 2021.

A Tory party that dominated the political landscape under Boris Johnson is now contemplating how big its defeat will be at the next general election, while Labour has gone from the political wilderness to eyeing the kind of triple figure majorities last achieved under Tony Blair.

So, which of the UK’s two potential governing parties should utilities fear most?

Labour

Labour opened its annual party conference, which was held in Liverpool, by putting the net zero transition at the heart of its prospectus for government.

The opposition has been criticised since Sir Keir Starmer took over the party’s leadership in early 2020 for failing to put forward a positive vision.

However, that changed in Liverpool as Labour opened its annual gathering with an ambitious pledge to decarbonise the electricity grid by 2030.

While Sir Keir likes to portray himself as a safer pair of hands than Jeremy Corbyn, this pledge is in line with his predecessor’s 2019 manifesto promise to source 90% of electricity generation from renewable sources by the same date.

The Labour leader also mollified his left-wing activists with a pledge to turn the UK into a “clean energy superpower” by setting up new publicly-owned low-carbon generation company, which would be known as Great British Energy.

The new Labour leadership’s goal is that GB Energy will have a remit to develop low-carbon generation, like renewable and nuclear power.

The idea, Sir Keir said, is to create a UK-owned energy champion on the lines of Danish state-owned energy company Orsted, which has played such an important role in developing the North Sea’s offshore wind resources.

The proposal also responds to post-Ukraine invasion concerns about national security by addressing the UK’s dependence on companies controlled by potentially hostile overseas governments.

Josh Buckland, Theresa May’s former energy and environment special advisor when she was PM, says the commitment to the 2030 decarbonised grid target is “pretty stretching”.

And there is little clarity on Labour’s plans for GB Energy, he says: “It’s not completely clear in terms of technology choices and what it really means in terms of delivery.”

Jonathan Reynolds, shadow secretary of state for business, told Utility Week at the Labour conference that the new company wouldn’t be a supplier.

However, the picture isn’t “necessarily binary”, Buckland says, pointing as an example to how the kind of local community energy projects that GB Energy might invest in could easily end up supplying cut price power to local residents, like Octopus is proposing.

Even if Labour seeks to steer GB Energy clear of becoming a supplier, a bigger concern is that a new state-owned company could crowd out investment in sectors, like offshore wind, which currently have little trouble attracting capital.

“I don’t think it makes any sense for it to be operating in relatively mature markets,” says Phil McNally, senior researcher on Net Zero at the Tony Blair Institute for Global Change – the ex-PM’s think tank.

He notes that the likes of Drax and SSE may be concerned about a state-owned entity encroaching on their turf.

Labour’s proposal could have a bigger role to play in getting more capital hungry and less mature technologies, like hydro and tidal power projects off the ground, says McNally: “It really makes most sense in less mature technologies with a higher risk factor where the government is uniquely well positioned to manage those risks and take bets.”

Nuclear power, which currently relies on elaborate mechanisms like the Regulated Asset Base model to attract private finance, could also benefit from GB Energy. Commentators say there are similarities between Labour’s proposal and the current government’s plan to set up a state backed GB Nuclear company to kickstart development in the sector.

Tom Davis, head of corporate affairs at Hinkley Point and Sizewell developer EDF Energy, told Utility Week at a Labour conference fringe event that GB Energy is exactly the kind” of idea that should be looked if Labour wants to deliver its pledge to decarbonise the electricity system by 2030 by stimulating investment in low-carbon projects.

However, as Labour increasingly assumes the role of government in waiting, the blank spaces in its plan will need to be filled in, says Buckland: “Until it’s more defined, it’s pretty difficult to see exactly the role that plays and the gap that it fills in the energy system. The real challenge for Labour over the next 18 months is to take their headline commitments and start to put more meat on the bone.”

Conservatives

Barely six weeks ago, Kwasi Kwarteng made the switch from secretary of state for BEIS to chancellor of the exchequer, the second most important job in government.

However, only Ted Heath’s chancellor Iain MacLeod, who died exactly a month after being appointed, has had a shorter time in the job than Kwarteng, who is once again on the backbenches.

While the ex-chancellor’s wider reputation has been shredded since he entered No 11 Downing Street, at least he had a sound grasp of the sector’s needs after his time as energy minister and then secretary of state at the BEIS department.

“Kwasi understood how the energy markets and the energy industry worked, so it’s a real shame that he’s gone,” says one energy executive.

The government’s Energy Price Guarantee is being scaled back by his successor Jeremy Hunt, who has announced a Treasury-led review of whether the support package can be better targeted.

However, the government’s move to cap the revenues of low carbon generators has sparked greater consternation amongst utilities.

The proposed ‘Cost-Plus Revenue Limit’, which is currently being rushed onto the statute book, is a less “straightforward” mechanism than just extending its levy on oil and gas producers’ windfall profits, says Buckland, who is now a director at public affairs company Flint Global.

The government will have to be careful, when framing the revenue cap, to take into account generators’ existing forward hedged positions and how it will vary across the different parts of the sector, Buckland says: “You don’t want it to apply to say, pumped hydro, which plays a critical role in demand.”

Off the record, energy companies have been spitting feathers about the sweeping nature of the powers that the bill gives the government, with one utility executive describing  the bill as an “absolutely astonishing… power grab”. As well receiving very little scrutiny because it is being rushed through Parliament in less than a week to put support mechanisms for businesses and households on a statutory footing, the bill lacks so called ‘sunset clauses’ that state when powers that it gives government will expire.

Emma Pinchbeck, chief executive of Energy UK, described the government’s decision to award itself these open-ended powers in the legislation as “troubling”.

In her keynote speech at the trade body’s annual conference in London on the day that the bill was published, she said: “We need to be careful that we don’t end up with short term measures or undermine the UK’s reputation for stability and deter the investment we need for the next decades.”

While the government may be motivated by a desire to keep its options open in a very volatile environment, taking on these powers is the “completely wrong signal to send” to investors, says McNally.

“Investors are just going to down tools until they’ve got clarity on what the powers are actually and the price that’s going to be set. At the time when we don’t need a hiatus on investment, the government has taken action to encourage precisely that,” he says.

In addition, McNally points out, the revenue cap skews towards investments incentives away from renewables towards gas and oil. While the Energy Profits Levy on gas and oil contains an allowance for investment, there is no such provision in the revenue cap.

“In a crisis that has been created by gas, it’s unbelievably wrong and unfair,” a utility executive tells Utility Week.

Darren Jones, chair of the BEIS committee of MPs, echoed these concerns in a letter to business and energy secretary of state Jacob Rees-Mogg on the day before the bill was due to be debated in the House of Commons.

“Incentivising future drilling for gas, whilst not incentivising the installation of renewable technologies, seems to be at odds with the government’s intention to reduce our dependency on fossil fuels,” he wrote.

On top of this, the government has said it wants to relax planning rules on onshore wind while making noises to curb development of solar farms on agricultural land. Simon Maine, managing director of corporate communications at Brookfield, told Energy UK’s conference that these mixed messages are giving investors “whiplash”. They’re not the only ones.

Water

While energy utilities may feel pretty bruised after the last month, their counterparts in the water sector will be feeling even more thoroughly beaten up after the party conference season.

Following a summer, when news about sewage outfalls and water shortages competed for headlines, both major parties had the sector in their sights.

In his keynote speech at the Labour conference speech, shadow environment secretary of state Jim McMahon pledged to strike off water company directors who “routinely and systematically break” rules and ensure illegal activity is “punished”.

He said: “Being a custodian of water and the environment will be a duty again. The institutions intended to hold them accountable are weakened and toothless as water bosses laugh all the way to the bank.”

McMahon also said Labour would also deliver mandatory monitoring of all sewage outlets in a bid to help to deliver a legally binding target to end 90% of sewage discharges by 2030. This goal would be backed up by automatic fines for discharges with failures to make improvements paid for out of dividends rather than customers’ bills.

At the Tory conference, the party’s deregulatory wing was in the ascendant, albeit temporarily. However recently appointed environment secretary Ranil Jayawardena struck a more interventionist tone on water, observing that “government must step in if there is market failure”.

Noting that “water companies have a lot to answer for”, he confirmed that he would be taking forward plans to lift the cap on Environment Agency fine for breaches of its rules up to £250 million from the current level of £250,000.

The role of utilities in tackling the trilemma and the policy framework that can support it will be debated at Utility Week Forum on 8-9 November. Find out more here.