A blow for offshore wind

The UK’s renewable energy strategy has been dealt a blow as no new offshore wind project contracts have been bought by developers in the latest key government auction. While there were no bids for new offshore wind farms, there were deals for solar, tidal, onshore wind projects and for the first time, geothermal. The UK is a world leader in offshore wind power with four of the world’s largest farms, supporting thousands of jobs and which provided 13.8% of the UK’s electricity generation last year. So, what has gone wrong?

The annual auction invites energy suppliers to bid for long-term contracts with a guaranteed price from the government for the electricity they will generate. This involves a Contract for Difference (CFD) where the successful bidders agree to pay back excess profits to the energy companies they are supplying. However, they take confidence from investing by a similar measure whereby if prices fall below the guaranteed price the energy suppliers receive the difference.

Potential bidders for the new contracts had signalled well in advance their concerns that the government’s rumoured £44 per megawatt hour price floor did not take account of higher costs due to inflation and interest rates. Subsequently, the government said a global rise in inflation had impacted supply chains and presented challenges for some projects. It added that the lack of interest in the offshore wind contracts, were similar to results in some other countries such as Spain. Nonetheless, it is a blow to the UK’s pledge to deliver 50 gigawatts of offshore wind energy by 2023, as the latest contracts would have generated 5GW of power, enough to run five million homes.

This news comes as the FCA is undertaking its proposed and arguably much-needed ESG (Environmental, Social, Governance) benchmarking rules with an outcome expected by the end of the year. British investors are reported to have already cashed in £2bn of their ESG fund holdings since mid-year. Does this reflect higher interest rates or investor confusion surrounding ‘greenwashing?’

 

What have we been watching?

 

Markets continued to watch inflation numbers and central bank guidance. US core inflation dipped while European interest rates appear closer to the peak, albeit likely to stay higher for longer. However, the price of oil price continued to edge higher, reaching almost 30% higher than at mid-year which is not helpful for the economy or inflation. Higher gasoline prices accounted for more than half of the increase in monthly US inflation in August. The week ahead will see key interest rate decisions by the US Federal Reserve on Wednesday and the Bank of England on Thursday.

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In the UK, wage growth remained at a record high in the three months ended July at 8.5% which will keep pressure on the Bank of England on interest rate policy. UK GDP is estimated to have contracted by 0.5% in July although wet weather appears to have affected both the retail and construction sectors.

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The European Central Bank (ECB) delivered the expected 0.25% increase in interest rate to 4%. ‘The governing council considers that the key ECB interest rate has reached a level that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.’ The ECB is forecasting average inflation of 5.3% for 2023, falling to 3.2% in 2024 and then dropping to 2.1% in 2025. Eurozone economic growth is forecast to be 0.7% in 2023, 1% in 2024 and 1.5% in 2025.

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In the US, the August inflation data was mixed. The monthly increase came in well ahead of expectations at 0.6% with more than half of this driven by higher gasoline prices. However, more encouragingly the core rate of inflation dipped from 4.7% to 4.3%.  The data is not expected to alter the Federal Reserve’s thinking with the market expecting US interest rates to be kept on hold at its meeting later this week. However, US retail sales in August pointed to strong consumer spending and were ahead of expectations despite higher borrowing costs.

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The Peoples Bank of China continues to support China’s currency against strong capital outflows. In another sign of China’s domestic woes, major bank bad debts rose by 35% in the first half of 2023, representing 1.8% of total loans.

The People’s Bank of China announced further fiscal easing as it cut the reserve requirement ratio by 0.25% to 5%. Chinese economic data was also more encouraging with August retail sales increasing by 4.6%, industrial production growing by 4.5% while fixed asset investment was up by 3.2%.

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Brent oil continued to edge higher, moving above $94 following the extended Saudi Arabian production cut.

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Finally, following last week’s Alpha Bites Made in China – Brussels is launching an anti-subsidy investigation into China’s electric vehicles ‘distorting the EU market. The probe could become one of the world’s biggest trade cases as the EU tries to prevent a repeat of what happened to its solar industry in the early 2010s, when panel manufacturers were undercut by cheap Chinese imports.

 

Read Last Week’s Alpha Bites – Made in China

 

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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.