Following a campaign in which energy policy was a key plank of the Labour party’s pitch, we are now in the second week of the new government. Reflecting on this change of government, we see a strong case for businesses to adopt flexible contracts for gas and power.
Onshore impacts
Sterling was buoyed by a decisive result in the election, helping to reduce the cost of gas and power imports from the continent. Conversely, exports of UK gas and power become more expensive for overseas buyers, helping to keep more of these onshore.
Chancellor Rachel Reeves took less than four days to make a speech touching on renewable energy, promising to lift the de facto ban on onshore wind. Further detail on GB Energy, the Labour government’s green investment vehicle, will be announced in the near future. At the initial stage, this looks to be a vehicle via which the public and private sectors cooperate to ramp up renewable generation, akin to the Green Investment Bank launched in 2012. Initial optimism could perhaps be tempered by the fact the GIB was ultimately sold off to the private sector five years after its creation.
With planning policy to be geared towards green generation, the UK can perhaps look forward to more of the troughs in wholesale cost we have seen in recent years, when high levels of wind generation drive down the day ahead power price significantly. Equally, high penetration of renewables has proven to increase volatility. When the wind doesn’t blow and the sun doesn’t shine, the only measure to balance supply and demand becomes price.
International cooperation
The energy markets are a vast exercise in international cooperation, not least in Europe, where substantial webs of interconnector and trans-national pipeline keep gas and power flowing across the continent. With the incoming government signalling a less combative approach to European partners than we have seen in recent years, there is cause for optimism for the future.
Planning and regulatory challenges
Tempering that optimism, we note the intractable planning issues which the new government will need to overcome. Construction of new wind farms onshore is almost certain to be met with significant resistance from the NIMBY lobby. Similar resistance can be expected in relation to new solar farms, and installation of the grid infrastructure necessary to move renewably-generated power around the country. With a relatively shallow landslide built on narrow majorities across a broad geographical area, it is likely some resistance to new developments will come from the new government’s own MPs.
We must also consider the regulatory environment and its effect on investment. Whether public or private, investors rightly expect a return on the significant investment made in building of generation facilities. A more interventionist government, elected on a promise to cut energy bills, may be tempted to implement a price cap in order to deliver on that promise. This kind of intervention – while attractive to consumers – would present a cause for deep concern among potential investors.
Adapting to change
Change is often the only constant in the energy markets, and the winds of political change are blowing through the sector once more. They bring with them promises of reduction in wholesale energy costs, so we advise businesses to embrace the kind of flexible contract that allows them to take advantage of these changes, whilst having the ability to limit upside exposure.
Contact us to see how we can help.