What Starmer’s Clean Energy Strategy Means for Investors

A common complaint among UK voters during this year’s election campaign was that there was little difference between the two main parties. At least on climate and energy policy, this was unfair.

Rishi Sunak’s Conservative Party has made it a political goal to weaken green policies and highlight the costs of energy transition for households. Sir Keir Starmer’s Labour manifesto has made low-carbon growth an organizing principle, with a central ambition to make the UK a “clean energy superpower.”

The election result was a landslide victory for Labour, with the Conservatives suffering their worst ever result. This contrasts with last month’s European Parliament elections and the ongoing French elections, which were widely seen as reflecting a loss of momentum around green politics.

But how will the new UK government attempt to achieve its clean energy targets and what opportunities will this create for investors?

Key questions about Labour’s green growth strategy

It is worth noting that Labour’s landslide victory came despite winning just over a third of the vote. But thanks to the quirks of the British electoral system, it now has a huge electoral mandate to pursue environmental goals that are far more ambitious than those of the outgoing administration. The answers to the following questions will determine whether Starmer and his team will succeed.

Can the new government restore private sector confidence in clean energy policies?

Business sentiment around green investment in the UK has been shaky of late, with Sunak’s government failing to introduce broad incentives to rival those offered by the US under the Inflation Reduction Act, and the weakening of environmental targets last September further weakening confidence.

Apparently influenced by academic Mariana Mazzucato, who advocates a “mission-driven government” (see our interview here), Starmer’s government has declared clean energy one of its two most important “missions”, alongside economic growth. This approach – combined with a huge majority – should provide businesses with the certainty of stable policies they will need to make big investment decisions.

Much of that has already happened under the Conservative government. Britain’s investment in the energy transition rose 84 percent last year to $73.9 billion, the fourth-highest in the country, according to analysts at Bloomberg NEF. But that annual investment will need to nearly double, analysts warn, for Britain to hit its net-zero emissions target.

As part of its efforts to close the gap, Labour will use corporate and financial regulation to pressure the private sector, including introducing a new requirement for financial institutions and large listed companies to publish transition plans that are aligned with the goals of the Paris Agreement.

Further influence on the financial sector is set to come from the Bank of England, which will reinstate climate issues in its mandate after they were removed last year by Chancellor Jeremy Hunt. Pension fund managers and other long-term investors will seek new incentives linked to domestic infrastructure investment, on which Labour has so far been vague.

But the most closely watched part of Labour’s plan will be two new multi-billion-pound investment vehicles.

Will Labour’s new investment bodies have an impact?

In February, Labour slashed its much-vaunted £140bn green investment and spending plans over five years to just £23.7bn. Most of the slimmed-down figure is to be spent through two new bodies designed to catalyse much larger amounts of private sector investment.

Great British Energy, which will be capitalised at £8.3bn during the next parliament, will be a publicly owned company funded by a windfall profits tax on oil and gas producers. It will have a mandate to invest in clean energy technologies and individual projects, as well as supporting local clean energy investment through local authority finance and low-cost community lending.

The National Wealth Fund, which is set to receive £7.3bn, will invest in strategic industries to promote growth and clean energy, with a target of attracting £3 of private investment for every £1 invested. More than a third of its capital will go to the steel industry, with other target sectors including ports, electric vehicle batteries, carbon capture and green hydrogen.

These new green investment moves come despite Labour’s plans for an across-the-board cut in public investment as it seeks to demonstrate its fiscal discipline. It will want to show that investment wisely directed towards the green transition can have a disproportionately large impact.

The focus on new investment bodies will be particularly strong given the slimming down of Labour’s Warm Homes Plan to insulate and electrify homes, with its budget cut from £6bn a year to just over £1.3bn.

Will Labour meet its 2030 energy target?

Labour may have scaled back its green spending plans, but it still has ambitious decarbonisation targets – the most important of which is a plan to eliminate emissions from electricity generation by 2030.

That promise has been met with widespread scepticism. Gas-fired power stations provided 32% of Britain’s electricity last year, with coal providing another 1%. Growth in low-carbon generation would need to accelerate rapidly to replace most of those fossil-fuel plants, with carbon capture technology deployed in those that remain.

Labour has outlined its plans to accelerate the deployment of clean energy, but much of the detail is still missing (an Institute of Government report outlines possible ways to achieve this).

Planning reform will be a key element – ​​renewable developers have faced lengthy and cumbersome approval processes, with a small number of local residents often able to block projects. Labour has also pledged to streamline the approval process for nuclear power plants and to work on modernising the transmission network, which it says is a “barrier” to clean energy deployment.

Meanwhile, Labour will reinstate a plan to ban the sale of combustion engine cars from 2030, after Sunak brought forward the date to 2035. Starmer’s team hopes the policy will help make the UK a centre for the development and production of electric vehicles, which accounted for just 16.5% of new car sales last year.

How strong will the political reaction be?

Conservative strategists have apparently identified climate policy as a potential sticking point. Sunak’s campaign has sought to contrast his “pragmatic” approach to climate policy with Labour’s strategy, which he said would ultimately impose costs on households. The defeated party must now decide whether to double down on this line of attack in opposition.

Labour is trying to win political support partly by putting a focus on jobs. A “British Jobs Bonus” of up to £500m a year from 2026 will subsidise job creation by clean energy developers. Labour has also promised to give a share of profits from new renewable energy projects back to local communities to boost public support.

Another hotly contested area is likely to be the oil and gas sector, where Labour and Conservative platforms have been very different. Sunak’s government has promised to “maximise” North Sea oil and gas production to support energy security and national income. Starmer’s team has promised not to issue any new licences, although it admits that North Sea drilling will continue for “decades”.

It is worth noting that the Liberal Democrats, who won a record 71 seats, had an even greener manifesto than Labour and will press Starmer to raise his low-carbon ambitions even further – as will the Green Party, which increased its seats from one to four. Nigel Farage’s right-wing Reform UK party, which has called for the UK to scrap its net zero emissions target altogether, entered parliament with five seats.

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The Chinese government is currently considering its updated decarbonisation strategy. The outcome will be crucial to the planet’s future, writes Adam Tooze.