In less than two weeks, the UK will hold a general election, with climate policy emerging as a major point of contention among the parties. In this feature, 9fin looks at the sectors most likely to be impacted by the election and the shifts in climate policy that may follow.
Oil and gas
The Tories see oil and gas as vital for energy security, but Labour is likely to be slightly less supportive of the sector.
Both parties plan to maintain the current North Sea oil and gas licenses. Labour has announced it will not provide any new North Sea drilling licenses, but the Conservatives plan to continue annual licensing rounds.
Both parties also plan to maintain the current windfall tax placed on oil and gas companies, but Labour aims to get rid of the tax’s “loopholes” and increase the levy rate by 3%. Similarly, while the Conservatives plan to maintain the investment allowances that provide incentives to invest in the North Sea, Labour plans to remove them.
Under a Labour victory, oil and gas companies with high exposure to the North Sea may want to consider moving their operations elsewhere or investing in renewables. With most licenses set to expire after 2040, however, it is unlikely oil and gas companies will be majorly impacted by the rules. Labour’s tax changes and lower investment allowances are more likely to have a short-term impact by increasing costs for UK-based issuers (e.g EnQuest, Harbour Energy, IOG, Ithaca Energy, Siccar Point Energy, Trident Energy, Tullow, Apache Corporation, Energean, INEOS, Neptune Energy, Prax, Repsol, Waldorf Production, Wintershall DEA).
The current windfall tax is already having an impact on some issuers. In its FY 22 Annual Report, Harbour Energy stated that, “despite strong operational and financial performance”, their “share price underperformed industry peers, largely as a result of exposure to the UK windfall tax”.
Water
Regardless of the victor, water companies have a storm heading their way. Both parties are targeting executive bonuses, with the Tories planning to remove executive bonuses for “serious criminal breaches” and Labour planning on doing the same for “failing water companies”.
Labour goes a couple steps further than the Tories, however, with plans to bring criminal charges against persistent law breakers and to put failing water companies under “special measures”.
Although not technically LevFin credits, Thames Water (and its securitised debt pile), and Anglian Water will be ones to watch.
See 9fin’s coverage of Thames Water here.
Renewables
Both parties aim to invest in renewables, but Conservative plans are dwarfed by Labour’s ambition.
Labour has made it clear it aims to double onshore wind, triple solar, and quadruple offshore wind by 2030, while the Conservatives outline plans to treble offshore wind but don’t outline specific targets for onshore wind or solar.
Notably, biomass doesn’t feature in either parties' manifestos, meaning the future of subsidies for companies such as Drax and Graanul Invest is up in the air. According to Ember, Drax earned £539m in subsidies in FY 23 (6.6% of revenue). Note: 9fin was unable to confirm these figures and could not find figures for Graanul Invest.
Although it’s not clear to what extent the two events are related, Drax’s stock price fell 8.6% on the day of the election announcement.
Finance
The Tories haven’t touched on sustainable finance, but Labour has signalled changes aimed at making the UK the “green finance capital of the world”.
First on their agenda are plans to reverse the Tories’ decision to prevent the Bank of England (BoE) giving due consideration to climate change in its mandates. This should enable the BoE to take more decisive measures against the threat that climate change poses to price stability and the financial system.
Under a Labour government, UK-regulated financial institutions, including banks, asset managers, pension funds, and insurers, and FTSE 100 companies, will all be mandated to have transition plans that align with the Paris agreement. Under the SBTi’s methodology, financial institutions cannot make new investments in fossil fuels if they want to be aligned with the Paris Agreement. This could be another blow to the oil and gas sector.
Carbon
Both parties support introducing a carbon border adjustment mechanism (CBAM), although it’s not clear how it will work in principle.
The aim of a CBAM is to ensure the carbon price of imports is equivalent to the carbon price of domestic production. That would prevent companies from moving production abroad to countries where less stringent climate policies are in place.
The Conservatives outline plans to implement a new import carbon pricing mechanism by 2027 to ensure that imports of iron, steel, aluminium, ceramics and cement from countries with a lower or no carbon price will face a comparable carbon price to those goods produced in the UK.
Labour has not provided specifics on timing and the industries likely to be affected, but the party said it aims “to prevent companies from dumping lower-quality goods into British markets” (more info below). The Financial Times reported that Labour is looking to realign the UK’s carbon regime with the EU, indicating it would introduce a mechanism in 2026. It’s likely this would also be coupled by a move to align the UK’s Emissions Tradings Scheme with the EU’s.
The timeline is important as some experts have warned that introducing a UK equivalent in 2027 (like the Tories plan on doing) could lead to the UK becoming a temporary dumping ground for goods like iron, steel, cement, and fertiliser, as global competitors look to avoid paying the EU’s carbon tax.
Large UK-based importers or manufacturers of raw materials and carbon intensive goods (e.g Cemex, INEOS, Outokumpu, CF Industries), are likely to be affected by the decision.
