The UK energy sector appears to be caught between a rock and a hard place

As the political campaign for the 2024 UK general election enters its decisive phase, few in the country’s energy sector believe that the pending decision-makers will deliver a pragmatic, safe and workable plan for the future.

In reality, the election results, which will be announced on Friday morning, are not generating much enthusiasm either among the opposition Labour Party led by Kier Starmer, who is widely considered to be the frontrunner for the new government, or among the incumbent Conservative Party of Prime Minister Rishi Sunak.

In many respects it is difficult to find major differences between their visions for the UK’s energy future.

Competitive or imitative visions?

Sunak’s Conservatives want to continue granting drilling licences in the ageing North Sea, where production peaked almost a quarter of a century ago, his government confirmed in September. But it will continue to subject oil and gas revenues to a so-called windfall profit tax until March 2029. Including the basic 35% tax on profits, it increases producers’ overall exposure to 75%.

Starmer’s Labour Party, for its part, will not revoke North Sea drilling licences already granted by the government. But it will not issue new ones if it wins power. The party has also proposed increasing the tax to 78%.

Both parties are also offering grants and subsidies of varying degrees to support the energy transition to renewables. However, the Conservatives propose shifting the burden of this from consumers’ bills to producers by reducing various green fees.

Meanwhile, the Labour Party is proposing something as surprising as it is surprising in the context of reducing energy bills – the creation of a state-owned company, GB Energy.

Details revealed by Starmer in Scotland on May 31 appear to indicate that GB Energy will not be an energy retailer. According to a spokesman, it will generate, develop, own and operate energy assets alongside private companies with an initial capitalisation of £8.3bn ($10.5bn) over a single parliamentary term.

And yes, it will be partly funded by a “windfall profits tax on oil and gas companies”. To be sure, the unconvincing argument, which is unlikely to directly impact consumer bills, was made by Starmer, who brandished his green credentials while flying in on a private jet after criticising his opponent for using it.

Not listening to the right people

There is widespread disillusionment in the industry as the country’s two main political protagonists pay more attention to social media jibes than to what industry experts say.

Several MPs, mostly Labour MPs, including Starmer himself, have in the past praised the disruption caused by protest groups such as Extinction Rebellion, following trends on social media. Although more recently, Starmer has regularly criticised environmental protest groups for making life harder for consumers.

Your correspondent found serious concern about the future in Aberdeen, Scotland, the UK’s energy capital, during a recent pre-election visit. Many industry leaders complained that their genuine concerns were being ignored.

Many have said that Labour’s proposed windfall tax increase and the general uncertainty could simply tip the scales in the industry’s favour. Paradoxically, many have noted that it could also have a negative impact on the expansion of the country’s renewable energy footprint.

UK industry body Offshore Energies UK (OEUK) said: “The industry is being taxed on windfall profits that no longer exist and is now facing a fourth round of fiscal changes and disruption in less than two years, making it impossible to plan for investment in the energy transition and the path to net zero emissions.”

It also follows a gradual deterioration in business conditions in recent years. John Heiton, CEO of OEG Energy, a cross-sector provider of renewable and traditional energy outsourcing services, said the operating climate had been deteriorating for almost a decade, with no end in sight to the turmoil.

“We do not take any political positions, but political and operational uncertainty dating back to the Scottish referendum continues to pose challenges to our business.

“First came the political rift that divided Scotland, then Brexit, and now punitive taxation of traditional energy (which could increase even further). While the immediate impact of such events can be mitigated from a business perspective, making decisions about future investment has become even more difficult.”

The wider problem of fuel poverty may be an unintended consequence of an overt focus on promoting or restricting one or more aspects of the UK’s energy mix at the expense of another, according to Christopher Hudson, chief executive of dmgevents, which organises more than 30 annual global energy events.

“It becomes problematic when politicians engage too much with some of the echo chambers that exist on social media and see them as a reflection or microcosm of the wider world. We see that in the UK and it’s by no means unique to the country.

“A low or zero carbon future is on the horizon, but traditional energy will continue to play a key role in our wider energy mix for decades to come, alongside renewables. This reality should not be obscured by social media telling people and politicians what they should or shouldn’t do.”

Unfriendly investment climate

Many are complaining about the hostile investment climate, and not just because they are outside the echo chambers that have the ears of the government and opposition parties. This looks unlikely to improve after the election, and it is already starting to hurt.

As the UK’s leading energy capital lobby group, Aberdeen and Grampian Chamber of Commerce, has noted: “There is evidence that investors are walking away from energy deals, with some openly opposing the UK on high tax grounds. If this sentiment gains momentum, the 1,000 jobs we have already lost to the Windfall Tax could be a drop in the ocean compared to what is to come.”

Jim Johnson, chief executive of FTSE 250 precision subsea and space engineering company Hunting, shares this view, adding that the UK is heading down a “suicidal path” of energy policy, which is already in place and likely to continue, and which clearly lacks any sense of realism.

“The Windfall Gains Tax is a bad idea that has passed its sell-by date. Instead, it has been extended and may be extended by a future government. It risks destabilising the UK energy investment ecosystem, which from our perspective is not very attractive in its current form.”

He reiterated his earlier views: “Our shares are traded domestically in the UK where there has been a perception that the public simply hates oil and gas, which may or may not be true but which sections of the media accept as the gospel truth.

“As a result, the political class seems to have no clear strategy, paying too much attention to social media and advocating excessive regulation of businesses and imposing taxes that are counterproductive.”

Johnson is not alone in sharing these views. None other than FTSE 100 energy giant Shell (LON:SHEL) saw its CEO Wael Sawan express similar sentiments earlier this year.

He compared the fact that Shell feels more welcome in American business circles compared to the UK, where his company, despite its best efforts, is still undervalued.

This should be a source of serious concern for any new government. Shell accounts for 10% of the total value of the FTSE 100. It is also the largest of only four companies on its blue-chip FTSE 100 index worth more than £100 billion ($124 billion). The other three are AstraZeneca, HSBC and Unilver.

Yet neither of the two main parties in the UK addressed this directly or even hinted at it during the election campaign. In fact, throughout the election campaign, which is coming to an end, there has been a lack of candor about the energy sustainability trilemma (sustainability, security and affordability) – i.e. how focusing on one at the expense of the other can have serious consequences.

There’s little to distinguish between the regressive stances of the country’s two main political parties, whose policies seem to be written on the back of a cigarette packet (or perhaps a social media post), as the British often joke. But it’s no laughing matter that UK Energy Inc. is caught between a rock and a hard place, come what may.