A greener, dearer, darker future?

The recent unpredictable British weather really should be a wake-up call for the new Secretary of State for Energy and Net Zero, Ed Miliband.

Before Storm Bert hit, the UK experienced an extended period of anticyclonic gloom with little wind and zero hours of sunshine. This adversely affected the UK’s wind and solar power generation. Ed Miliband is seeking to save £300 on household bills by 2030 by using – renewables – but how much will energy costs have risen in the intervening period?

To make matters worse, in a recent Institute of Economic Affairs (IEA) report, UK industrial electricity prices are highlighted as the highest of the 28 countries covered by the IEA. UK prices are a staggering four times those in the US! No wonder the biggest global businesses are reconsidering their manufacturing bases.

The UK’s power infrastructure is complex, with a mix of subsidies, levies, and carbon taxes distorting charges. Renewable subsidies and other associated costs, such as grid balancing, storage, and extra spending on the grid, conspire to drive up costs.

In shifting to greater reliance on renewable energy and Britain’s unpredictable weather, the backup market is becoming more important. The backup market is the so-called electricity capacity generated by power stations that are often gas-fired and paid to step in when the wind or sunshine is not sufficient to meet the UK’s needs. The backup costs are covered by environmental levies on bills.

Meanwhile, the government is trying to encourage UK households to switch from petrol cars and gas central heating to electric cars and heat pumps. This in turn will drive demand for even more electricity.

How should the shift to renewables be paid for?

Campaigners have argued that the government move the costs of environmental levies from electricity bills and on to gas bills or fund them through higher taxes. Both these options look like non-starters for the government. A tax increase would go down like a lead balloon with voters, while a levy on gas would risk pushing up heating costs for those using gas-fired boilers, so most UK households!

The National Energy System Operator (NESO), the body responsible for linking renewable projects to the energy grid, has published the Clean Power 2030 (CP30) report. This states that Labour’s plan to decarbonise electricity by 2030 will require £40bn of investment. This is double the amount of network infrastructure needed over the next 5 years, and more than has been invested over the last 10 years.

Meanwhile, the UK emits under 1% of global CO2 emissions compared with 25% for the US.  Donald Trump has declared climate change ‘all a big hoax,’ and his mantra is ‘Drill baby, drill.’  Manufacturers will always be attracted to the country with the lowest cost and most reliable energy.

On the face of it, Ed Miliband’s green agenda does not bode well for Labour’s economic growth ambitions and the broader UK economy.

What have we been watching?

A quieter trading week with the Thanksgiving holiday in the US.

US equities continued to bask in Trump’s election victory. The latest development is the appointment of hedge fund manager Scott Bessent as the next US Treasury Secretary. He has outlined a – ‘3-3-3’ strategy that would see the ‘US budget deficit cut to 3% of GDP by 2028, achieve 3% GDP growth, and America produce an extra 3 million barrels of oil a day.’

Trump is already starting to cast a shadow across the global economy. On the Truth social platform, he said he would impose 10% tariffs on China, above any additional tariffs, along with 25% tariffs on Canada and Mexico on all products. China, Canada, and Mexico’s currencies all weakened slightly on this news. Mexico’s president warned that ‘one tariff will come in response to another and so on until we put shared companies at risk.’ Meanwhile, European Central Bank (ECB) president Christine Lagarde has urged EU leaders to cooperate with Trump over tariffs and buy more products from the US such as gas or defence equipment. Elsewhere, the Bank of Korea cut interest rates by 0.25% to 3% citing slower economic growth and the ‘red sweep’ in the US. South Korea is Asia’s fourth-largest economy and is set to record its highest trade surplus with the US this year. Trump has also threatened the BRICS nations with 100% tariffs if they seek to undermine the US dollar by pushing alternatives to the American reserve currency.    

Some economists have warned the tariffs on Canada and Mexico could push US core PCE inflation in 2025 from 2.6% to 3.7% if fully implemented. Oil producers warned Trump tariffs on Canada will push up US gasoline prices by as much as 25%. Meanwhile, despite inflationary tariff threats, the 10-year US Treasury yield dropped to 4.2% on December interest rate cut hopes.    

Israel’s PM Benjamin Netanyahu announced a 60-day ceasefire with Hezbollah in Lebanon. A welcome respite but not a solution for the Middle East conflict.

Both Ukraine and Russia continue to vie for the strongest position they can achieve before Trump lands in office. To this end, Russia launched a massive drone and missile attack on Ukraine’s power grid to disrupt electricity supply and further demoralise the civilian population. Meanwhile, as the UK and European NATO members dither over increasing defence spending to up to 2.5%, Putin is to raise Russian defence spending to $126bn, or almost a third of its economy.       

---

 

In the UK, more dithering by the government. Chancellor Rachel Reeves has delayed the multi-year spending review from Spring to June 2025. This will create further uncertainty for those companies involved in government projects and risks undermining UK economic growth.            

---

 

In Europe, the French 10-year bond yield spread compared to German bunds hit the highest level since the Eurozone debt crisis of 2012. In fact, the French bond yield briefly exceeded the Greek equivalent bond for the first time in history! Markets are concerned that PM Michel Barnier will struggle to pass a budget next year enacting required spending cuts to reduce the nation’s debt. Given the economic woes in France and Germany, the ECB is expected to cut interest rates by 0.25% at its next meeting in December. Eurozone inflation was in line with expectations in November with CPI of 2.3% and core inflation of 2.7%.       

---

 

In the US, the Federal Reserve (Fed) published the minutes of its latest meeting. This showed that the committee members thought that with inflation continuing to move down sustainably to 2%, it ‘would likely be appropriate to move gradually toward a more neutral stance of policy over time.’ Markets currently suggest a 66% chance of a 0.25% interest rate cut by the Fed in December, but is this a bit too optimistic given Trump’s imminent inauguration and inflationary tariff threats?

---

 

Brent oil eased back to $72 on news of the ceasefire in Lebanon. OPEC+ delayed its next policy meeting to later this week, at which it is expected to further extend the current production cut.

---

Finally, talking of climate change. Denmark has agreed to implement the world’s first tax on agricultural emissions, which, mainly come from livestock. From 2030, farmers will have to pay a levy of £34 per tonne of methane. We can assure you that this is a true story and is not ‘BULL***T!

---

 

Read Last Week’s Alpha Bites – A friend to all is a friend to none

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2024 Alpha Portfolio Management, All rights reserved

Trading name text

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