Labour has launched its Great British Energy policy – do we need it?

Published

4 months ago

May 31, 2024

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The establishment of Great British Energy is among the last remnants of the ‘green prosperity plan’ devised and championed by Ed Miliband, the shadow secretary of state for energy security and net zero, three years ago.

The former Labour leader’s vision was to spend £28bn per year in the first five years of an incoming Labour government on decarbonising the UK economy.

However, as the current leader Sir Keir Starmer recognised, the issue was swiftly weaponised by the Conservatives because all the money – as Mr Miliband himself had made clear – would have been borrowed.

More importantly, the plan did not survive contact with Rachel Reeves, the shadow chancellor, who has made fiscal responsibility her priority.

The £28bn-a-year spending pledge was watered down in February this year to one of £23.7bn over the life of the next parliament.

A sizeable chunk of that will be on Great British Energy, described by Mr Miliband as “a new publicly owned clean power company”, which Labour has said will be initially capitalised at £8.3bn.

And, instead of the money being borrowed, Labour is now saying “it will be funded by asking the big oil and gas companies to pay their fair share through a proper windfall tax”.

What’s a windfall tax and what’s it got to do with green energy?

Before going further, it’s worth explaining what the current windfall tax is.

The existing ‘temporary energy profits levy‘ was launched by Rishi Sunak, as chancellor, in May 2022 and imposed an extra 25% tax on the profits earned by companies from the production of oil and gas in the UK and on the UK Continental Shelf in the North Sea.

Due to expire at the end of 2025, it raised £2.6bn during its first year.

Jeremy Hunt, as chancellor, raised the levy to 35% from the beginning of last year and extended its life to the end of March 2028. That ‘sunset clause’ was extended to the end of March 2029 in Mr Hunt’s spring budget earlier this year.

It effectively means that the total tax burden on North Sea oil and gas producers is now 75%.

Labour made clear in February this year that this would rise to 78%. It also plans to remove some of the investment incentives Mr Sunak put in place when it announced the current windfall tax.

That will undoubtedly have consequences.

Offshore Energies UK, the industry body, has said that, in its first year, the existing energy profits levy led to more than 90% of North Sea oil producers cutting spending. It has warned that Labour’s plans could cost 42,000 jobs in the North Sea and some £26bn in economic value.

So the increase in the windfall levy will have consequences for the overall tax take.

It is therefore important for Labour to make clear what changes in investment and hiring it is factoring in from companies operating in the North Sea as a result of higher taxation.

The big operators are already deserting the region. It was reported this week that Shell and Exxon Mobil are close to selling their jointly-controlled UK North Sea gas fields – marking the US giant’s final exit from the North Sea after 60 years.

And Harbour Energy, the biggest independent operator in the North Sea, has slashed investment in the region, along with hundreds of jobs, since the energy profits levy was introduced. It too is seeking to diversify away from the North Sea – having seen the energy profits levy wipe out its entire annual profits during the first year of the impost.

What will Great British Energy even own?

The second big question is what assets will be owned by Great British Energy.

Labour said overnight: “Great British Energy’s early investments will include wind and solar projects in communities up and down the country as well as making Scotland a world-leader in cutting edge technologies such as floating offshore wind, hydrogen, and CCS (carbon capture and storage).”

What is unclear, though, is whether this will involve buying existing assets from private sector operators, building new assets from scratch or co-investing in new projects.

It is worth asking the question because only the latter of these two options will actually add to the UK’s energy generation and storage capacity.

And, if it is to be the second or third options, the question is what return on capital employed Great British Energy will be seeking to achieve.

A risk that money could be wasted

All commercial operators seek to achieve a return on capital which exceeds their cost of capital.

Now, as a sovereign debt issuer with a good credit rating, the UK government enjoys a lower cost of capital than most corporates. But there will still be a nagging concern – given the traditionally poor stewardship of state-owned enterprises in the UK – that, without the discipline imposed by having shareholders, some of the money will be wasted.

Investments of this kind are risky and volatile.

An example of this came last week when SSE, one of the UK’s biggest and best-run renewable energy generating companies, admitted that Dogger Bank A, its giant wind project off the Yorkshire coast, will not be fully operational until next year rather than this year.

Is it needed when billions are being spent on green investments?

A third question is why, precisely, Great British Energy is needed at all.

The UK is already decarbonising more rapidly than any other major economy and is also investing heavily.

The Department for Energy and Net Zero recently estimated that there will be some £100bn worth of private investment put towards the UK’s energy transition by 2030.

National Grid announced only last week that it plans to invest £31bn in the UK on the transition between now and the end of the decade.

SSE is investing £18bn in renewable capacity in the five years to 2026-27. Scottish Power, another of the big renewable energy companies, recently announced plans to invest £12bn between now and 2028.

So it is not entirely obvious why a comparatively small state-owned company is even necessary.

Energy security and cost

Labour’s justification is partly based on energy security – Sir Keir has in the past queried why a Swedish state-owned power company, Vattenfall, should be the biggest investor in onshore wind in Wales – and partly on prices.

It said overnight: “Great British Energy is part of our mission to make Britain a clean energy superpower by 2030 – helping families save £300 per year off their energy bills.”

Again, though, this raises further questions.

Mark McAllister, the chairman of energy regulator Ofgem, told the Financial Times this week that energy bills were unlikely to fall substantially over the decade partly due to the costs of building out the electricity network to support the transition to renewables.

He told the FT: said: “As we build in more and more renewables, we’re also building in the price, amortised over many years, of the networks as well.

“If we look at the forecasts for wholesale prices and then build on top of that the costs of the network going forward, I think we see something in our view that is relatively flat in the medium term.”

And that begs the biggest question of all, not just for Labour, but for all the parties: why is it being left to a regulator, rather than the politicians, to spell out the costs to households of the energy transition?

Business

Labour lures BlackRock chief Fink to flagship investment summit

Published

3 hours ago

September 21, 2024

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Labour lures BlackRock chief Fink to flagship investment summit

The boss of BlackRock, the world’s largest asset manager, will attend the new government’s flagship investment summit next month amid suggestions it is struggling to attract large numbers of high-calibre international business figures.

Sky News has learnt that Larry Fink, BlackRock’s chairman and chief executive, will attend the 14 October gathering, which will be held at a prominent central London venue.

Mr Fink, who was also present at a similar event organised by the Conservatives in 2021, will be among the most influential global bosses to attend.

Among the others who have agreed to come are Margherita della Valle, the Vodafone chief executive, Hemant Taneja, CEO of technology investor General Catalyst, and John Graham, who runs the Canada Pension Plan Investment Board, one of the world’s largest pension plans, Sky News understands.

David Solomon, boss of the Wall Street bank Goldman Sachs, will also be there.

The emergence of some of those attending comes as Labour battles suggestions that it will struggle to draw the 300 industry leaders it pledged in early August.

Sources said fewer than 150 companies had confirmed their bosses’ attendance, with just over three weeks until the event takes place.

Roughly 100 ministers, metro mayors, officials and other government-connected figures are also expected to be present.

One insider insisted this weekend that “quality is more important than quality” and said the government remained on track to have 300 people at the summit.

That figure may ultimately be reached but comprising both the government and private sector delegations.

They questioned, however, why a formal numerical target had been set publicly when the summit was being staged at such short notice.

“It’s made us a hostage to fortune,” said one.

The event, which Labour vowed during the general election campaign to hold within 100 days of coming to power, is being seen as a key test of its economic credibility.

Whitehall officials are keen to announce investment deals worth tens of billions of pounds on 14 October, although whether they will hit this target is unclear.

Some corporate bosses, including the heads of Blackstone and JP Morgan, have declined the invitation, citing diary commitments.

Those two companies are expected to send alternates to the event, with Blackstone being represented by Lionel Assant, one of its most senior private equity executives.

Until recently, the government had insisted that only CEOs would be able to attend, with their invitations not transferable, according to insiders.

Aviva, Barclays, BT Group and HSBC Holdings will be among the FTSE-100 companies represented by their CEOs.

The business secretary, Jonathan Reynolds, told the Financial Times this weekend that details of the government’s industrial strategy would be set out before the investment summit.

That is expected to include the appointment of a chair for its Industrial Strategy Council, although it faces going into the event without an investment minister being appointed.

The summit will also be politically delicate given that it comes just a fortnight before Rachel Reeves, the chancellor, delivers her first Budget – with higher taxes affecting many of those attending on October 14 expected to feature prominently.

The Department for Business and Trade declined to comment, while none of the companies contacted by Sky News would comment.

Business

Trio of property giants oppose Cineworld rent cuts plan

Published

22 hours ago

September 20, 2024

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Trio of property giants oppose Cineworld rent cuts plan

A trio of property giants has lodged a protest against a radical financial restructuring that will see Cineworld imposing steep rent cuts on its landlords.

Sky News has learnt that British Land, Landsec and Legal & General Investment Management all voted against the cinema operator’s restructuring plan this week.

Cineworld has confirmed plans to close six of its UK multiplexes, but documents circulated to creditors show almost 50 others are in categories requiring landlords to agree to revised rent deals in order to ensure their long-term viability.

Although they carry significant influence in the commercial property sector, the trio’s protest will have no impact on the outcome of the company’s proposals, since its owners are now also among its largest creditors, meaning they can effectively force the deal through.

According to documents sent to creditors during the summer, 33 sites – categorised as Class B – “require a reduction of rent to ERV [Estimated Rental Value] Rent in order to place the sites on a viable long-term footing”.

A further 38 of Cineworld’s cinemas would be unaffected, while another 16 Class C1 and C2 leases require reductions to either turnover rent or zero rent in order to render them financially viable.

The documents added that the company did not have sufficient funding to meet a quarterly rent bill on June 24 of £15.9m.

“The UK group did not have sufficient liquidity to make the June 2024 Rent Payment and required further funding from the US Group to meet this liquidity need.

“Absent this funding, the UK Group would have been insolvent on a cashflow basis.”

Cineworld is being advised by AlixPartners.

Other cinema operators are now poised to step in to take over some of Cineworld’s sites.

The company trades from more than 100 locations in Britain, including at the Picturehouse chain, and employs thousands of people.

Cineworld grew under the leadership of the Greidinger family into a global giant of the industry, acquiring chains including Regal in the US in 2018 and the British company of the same name four years earlier.

Its multibillion-dollar debt mountain led it into crisis, though, and forced the company into Chapter 11 bankruptcy protection in 2022.

It delisted from the London Stock Exchange last August, having seen its share price collapse amid fears for its survival.

Cineworld also operates in central and Eastern Europe, Israel and the US.

Business

Consumer confidence slumps following warnings of ‘tough choices’ in budget ahead

Published

1 day ago

September 20, 2024

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Consumer confidence slumps following warnings of 'tough choices' in budget ahead

A long-running measure of consumer confidence has slumped to levels last seen at the start of the year following warnings of “tough choices” ahead in the looming budget.

GfK’s Consumer Confidence Index fell seven points in September to minus 20, with significant drops in predictions for personal finances and the general economy over the coming year.

The report’s authors suggested it was “not encouraging news” for the new government, which has made growing the economy its top priority.

Money latest: Millions already buying mince pies ahead of Christmas

But within weeks of taking the post of chancellor, Rachel Reeves – followed by prime minister Sir Keir Starmer – moved to warn of a legacy £22bn “black hole” in the public finances and said it would result in a painful budget on 30 October.

Among measures already taken include cuts to winter fuel payments, leaving up to 10 million pensioners up to £300 worse off, and inflation-busting public sector pay settlements.

Tax rises and spending cuts are widely expected in next month’s statement to MPs though The Times reported on Friday that a decision by the Bank of England to slow a programme of loss-making bond sales would leave Ms Reeves £10bn better off than she had anticipated.

It added that she was still expected to push forward with her budget plans anyway as a signal of her commitment to fiscal discipline.

The latest snapshot on the public finances, released by the Office for National Statistics (ONS) on Friday showed net borrowing of £13.7bn during August.

Its chief economist, Grant Fitzner, said: “Borrowing was up by over £3bn last month on 2023’s figure, and was the third highest August borrowing on record.

“Central government tax receipts grew strongly, but this was outweighed by higher expenditure, largely driven by benefits uprating and higher spending on public services due to increased running costs and pay.”

Consumer spending accounts for around 60% of the UK economy.

Data released separately on Friday showed a 1% rise in retail sales volumes during August in the wake of weakness, mostly blamed on poor weather, over the previous couple of months.

The ONS said that the increase was driven by supermarket sales, as demand for BBQ food and drinks rose due to the arrival of some sunshine over the key holiday month.

It also credited discounting by clothing retailers.

The data chimes with the latest updates from big retailers, including Next and B&Q’s owner, which have spoken of weak demand for so-called big ticket items such as home furnishings and kitchens respectively.

GfK’s closely-watched survey showed expectations for the general economy over the next 12 months fell by 12 points to -27, while the forecast for personal finances was down nine points to -3.

Commenting on its key measures, including the headline figure, consumer insights director at GfK Neil Bellamy said: “These three measures are key forward-looking indicators so despite stable inflation and the prospect of further cuts in the base interest rate, this is not encouraging news for the UK’s new government.”

He added: “Strong consumer confidence matters because it underpins economic growth and is a significant driver of shoppers’ willingness to spend.

“Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the budget decisions on October 30.”