A Great British Energy dilemma

The politics of power. Labour leader Sir Kier Starmer is looking to tap into concerns about climate change.

Starmer has announced that if his party wins the next general election, it would end new oil and gas exploration in the North Sea. Labour is also proposing to support renewable projects such as onshore wind and invest in nuclear power. Furthermore, in England, the planning rules which effectively ban new onshore wind farm developments will be scrapped.

Offshore Energies UK, the trade body which represents the North Sea oil and gas industry believes that there are 90,000 workers in Scotland, while the sector supports some 200,000 jobs across the UK. While Labour’s plan would not result in an immediate end to work in the North Sea, it would leave this skilled workforce exposed. How many of these jobs would transfer into offshore wind power and oil field decommissioning? Offshore Energy UK has also highlighted that 180 of the North Sea’s 283 active oil and gas fields are due to close by 2030 and that new licences are essential or production could plummet.

Labour has said it intends to honour any licences in existence at the time of the next general election which must be held by January 2025. This is likely to include the new Rosebank development west of Shetland. Sir Kier is believed to have held discussions with Norwegian state-controlled Equinor, owner of the Rosebank field to confirm a Labour government would not revoke any licences. The Rosebank development could produce 70,000 barrels a day at its peak.

Labour’s Great British Energy or GB Energy as it will be known, is a publicly-owned clean energy company that will invest in green industries and is to be based in Scotland. The plan appears to be to return profits from successful renewable energy projects to local councils to use at their discretion.

What is not clear yet is how Labour will fund GB Energy, given the demands for greater investment in the NHS, education and due to the war in Ukraine, higher defence expenditure. When GB Energy was announced in 2021, with a £28bn a year green investment headline, it was initially planned to be funded by debt. However with significantly higher borrowing costs, finding the money to support investment could be a political and financial challenge. Finding the right people to manage GB Energy will also be key. Spending money is easy, but spending it wisely and getting a fast payback with attractive return on capital employed is quite a different matter.

Whilst energy bills are set to fall, ominously, the head of the International Energy Agency has warned energy prices could spike this winter forcing governments to step in and subsidise bills again.  Last week, Centrica, owner of British Gas, warned that energy bills were likely to stay high for the foreseeable future.

What have we been watching?

The UK stock market was a clear underperformer in the second quarter, albeit gains last week did soften the quarterly decline. Stubbornly high UK inflation and higher interest rate expectations were major headwinds. The clear winner in the second quarter was the US NASDAQ technology index or to be specific the top handful of mega tech stocks, including-Nvidia, Meta, Amazon, and Tesla. Chip maker Nvidia was the standout stock with a gain of over 50% as the AI frenzy took hold. Otherwise, it was the usual game of investors second guessing peak US interest rates and the likelihood of further Chinese economic stimulus measures. Meanwhile, central bankers met in Sintra last week where there was very much a ‘hawkish’ chorus concerning interest rates.

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The final reading of first quarter GDP confirmed the UK has narrowly avoided recession, so far, with growth of just 0.1% quarter-on-quarter. Bank of England data showed that UK households withdrew a net £3.8bn from their savings accounts in May, the largest monthly total on record.

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In Europe, the challenges facing the European Central Bank (ECB) were again illustrated by a mixed bag of inflation data. The ‘flash’ HICP for June showed the headline rate of inflation down to 5.5% with only Germany recording an increase. Core inflation increased slightly on the previous month 5.4%.  

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Expectations that the Federal Reserve (Fed) will deliver another 0.25% interest rate hike in July have firmed up after a stronger than expected raft of US economic data. Home sales, durable goods orders, consumer confidence and jobless claims releases were all consistent with a robust economy. The Fed’s preferred core PCE measure of inflation was little changed at 4.6% in May. Fed Chair Jerome Powell said that there is still ‘a long way to go’ before the 2% inflation target is reached, raising the potential for another interest rate in September, besides that likely in July.

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Confidence among Japan’s largest manufacturers rose in June for the first time in seven quarters. The Bank of Japan’s Tankan survey is considered the broadest indicator of how Japanese businesses are faring.

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Chinese manufacturing saw a softer rise in activity last month with the Caixin survey index easing to 50.5 in May although this was slightly better than anticipated. However, China’s official PMI business activity indicator for June suggested the economic recovery is faltering.

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Brent oil held around $75 on soft manufacturing data and concerns about the pace of China’s economic recovery.

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Finally, the scale of the potential hit from higher mortgage rates is becoming clearer. The Bank of England estimates that over 4million households in the UK will have been forced to move onto higher mortgage rates before the next General Election. PM Rishi Sunak has said ‘inflation is the enemy’ but many homeowners may lay the blame regardless at his and the Bank of England’s door.

Read Last Week’s Alpha Bites – Inflation – Rocket Man

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.