DANNI HEWSON Why we need a long-term energy policy (but may not get one

DANNI HEWSON

AJ Bell Financial Analyst

Why we need a longterm energy policy (but may not get one)

The industry has been crying out for consistency from politicians for years

What will Jeremy Hunt’s windfall tax changes mean for energy infrastructure investment in the UK, it’s a fair question and one that’s already generated more than a few headlines.

Both the bosses of Shell (SHEL) and SSE (SSE) have warned their respective companies will have to review their slate of investments because of the changes, changes which have thrown previous ‘fiscal calculus’ up in the air.

On paper their comments might be viewed as brinkmanship, a bit of posturing and bluster in response to penalties on stunning profits which have come at the expense of UK households. But in reality, the Government must be hyper aware that the levies could fundamentally undermine UK plans both for security of supply and the ambition to decarbonise the power market by 2035.

WHY ENERGY INVESTMENT IS A LONG GAME

Building and expanding energy infrastructure is a long game, it takes years to plan and even longer to reach fruition.

Consider it was 2010 when Hinkley C was initially given a tentative green light. It’s been beset with problems not least Covid lockdowns. Even without the pandemic building a complex site the size of a small town was would inevitably have struggled both in terms of time and budget.

From concept to conclusion every step has to be carefully planned. A skilled labour force doesn’t just magically materialise it needs to be built and companies like EDF (EDF:EPA) work alongside colleges and universities to ensure what’s being taught nearby will deliver for both students and potential employer.

Taking that leap requires the knowledge that the investment will generate substantial returns. Investors have to be wooed; numbers need to be interrogated.

Just because energy prices are sky high at the moment doesn’t guarantee they’ll stay that way. In fact, the assumption is that the current geopolitical environment has created an unsustainable market, one which can only head one way.

It’s been 15 years since I sat next to the boss of

a northern utility company at an industry dinner. Our conversation was coloured by the fact that I was a reporter but despite the obvious caution with which he spoke he was clearly frustrated with the lack of long-term vision the political system allowed.

BUT POLITICIANS THINK IN THE SHORT TERM

The election cycle creates short-termism, what possible gain could a government get from green lighting a series of hugely expensive projects that won’t deliver results until long after those in power have relinquished their position?

It was a time when a number of older power stations were reaching the end of their lifetimes and questions were being asked about whether any of them could be revitalised, reworked for other fuels? Ultimately only one of the three in question made the change and Drax (DRX) is still an integral part of the UK’s generating provision.

Electricity capacity in the UK

Transmission entry capacity (megawatts)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 74,996 75,979 76,993 77,881 83,438 81,789 81,877 77,167 75,694 70,572 67,965 70,840 72,165 66,648 64,794 65,311

Chart: Shares magazine • Source: Department for Business, Energy & Industrial Strategy

DANNI HEWSON

AJ Bell Financial Analyst

The transition to net zero has helped focus political minds and Russia’s invasion of Ukraine has only served to further highlight the need for the UK to be as self-sufficient as possible when it comes to its energy needs.

The shift to clean green energy has created opportunity and appealed to all investors, not just those hunting for the E in ESG.

The green economy has progressed at speed and projects that once looked a bit woolly are now delivering some serious cash.

WHY IT’S A LACK OF STABILITY WHICH MATTERS

It’s not windfall tax itself that worries many, in fact the immediate reaction from investors once they’d had chance to scrutinise the small print suggests they’re hyper aware it could have gone much, much further. It’s more the fact that the electricity generator levy doesn’t at present look like it will be subject to any investment allowance unlike with oil and gas .

Gas has long been seen as an integral part of the transition process and if that gas can be extracted from the North Sea, if it can add to the treasury tax take, so much the better.

And this is Mr Hunt’s dilemma. The public are hurting, they’ve been asked to pay more to support our public services at a time they’re budgets are being squeezed by price rises, with energy taking the biggest bite out of the pot.

A recent survey carried out for AJ Bell found that 81% of those surveyed supported tax rises and the tax hike that got the biggest support was a windfall tax on energy company profits.

But additional taxes coupled with a lack of consistency muddies the waters. Is the UK the place for investors in clean energy or does it now have a great big question mark over it? If we are to make our net zero target a reality the Government will have to work hard to convince the industry and investors it’s still the former.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Danni Hewson) and the editor (Tom Sieber) own shares in AJ Bell.

Focused on fundamentals TR Property Investment Trust

Against a backdrop of higher borrowing costs, it’s been a challenging year for property investors. Why? Because as a typically leveraged asset class, any rise in the cost of capital can have a significant impact. Investors have turned away from fundamentals – focusing instead on macro and political factors. The result has been a sharp and broad-based selloff with little or no differentiation between subsectors, locations, or individual businesses.

We’ve long been mindful of the impact of tighter monetary policy and have worked to orientate our portfolio around businesses that have prepared well for increases in interest rates. Many well managed companies have moved to fix their long-term borrowing costs and these along with those offering index-linked income are selectively attractive for us. We look for talented and aligned management teams and, particularly among small and medium sized companies, can find specialists operating in areas with strong underlying real estate attributes. Logistics, student accommodation and residential are just some of the subsectors we currently favour.

The near-term outlook certainly remains uncertain – how far will rates rise, are we heading for recession, and can the UK government restore confidence and stability? Of course, it may be some time before we see a full recovery but we’re aware that after a large and indiscriminate correction many well-capitalised, quality and well positioned listed real estate business are trading at a significant discount to the value we see in their underlying assets.

Over time we expect fundamentals to reassert themselves in investor decision making. Here it’s encouraging to note that outside of retail the supply/demand dynamics remain broadly supportive and that in select subsectors and locations the conditions for rental growth remain intact. There is little issue with overdevelopment in the industrial/ logistics sector for example.

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.