This comment is published by Liberum Utilities Analyst Peter Atherton (pictured below), shortlisted for City AM's Analyst of the Year 2014.
In a nutshell
Speech by Former Secretary of State for the Environment, Owen Paterson MP, indicates the current political consensus on energy policy maybe be challenged.
Public and political debate is only likely to grow as inherent contradictions and unforeseen consequences of current policy become more apparent.
Current EU/UK energy policy is deeply flawed and utility companies and public market investors will be wary of committing further capital to support and deliver it.
Last night the former Secretary of State for the Environment, Owen Paterson MP, delivered the Annual Lecture to the Global Warming Policy Foundation. The speech has generated considerable press coverage. The full text can be seen here >>
In his speech Mr Paterson challenges the direction and basis of UK / EU energy policy. He states that current energy policy is failing to deliver the key goal of emission reduction whilst proving to be both un-affordable and a significant threat to security of supply. Mr Paterson recommended a change of course with a return to a more market based energy policy that would encourage technological innovation that in turn would reduce carbon emissions in a more affordable manner.
In practical terms Mr Paterson calls for the suspension / abolition of the Climate Change Act 2008 which provides the legal framework for current energy policy and puts into UK law various climate change targets, most notably the 2050 target to reduce greenhouse gases by 80% versus 1990. In order to secure affordable energy whilst reducing emissions Mr Paterson recommended that the UK focus R&D and investment in four areas; local shale gas, modular small scale nuclear, demand side management, and local combined heat and power.
Is the speech important for the Capital Markets?
The speech is the first time to our knowledge that a senior Conservative politician (recently in government) has called for a fundamental change of course on energy policy and explicitly for the abolition of the Climate Change Act. As the 2013 Energy Act is in effect an instrument to implement the Climate Change Act then the abolition of the latter would naturally lead to the abolition / revision of the former.
Mr Paterson's speech is an indication that the monolithic political consensus in favour of the UK's climate change driven energy policy is fraying somewhat. We are now seeing some recognition from politicians that current policy is struggling (to say the least) to satisfy the conflicting goals of reduced emissions, security of supply and affordability. For the public capital markets perhaps the only surprise is that it has taken so long for the political debate to begin.
However, Mr Paterson's speech is so far just an isolated event. As yet the political support for both the Climate Change Act and the Energy Act remains strong with all three of the main parties in favour.
The coming general election
Energy policy is likely to be an important issue in the forthcoming general election. It is likely in our view that all three main political parties will maintain their support for the current policy direction. Indeed, the Labour Party has stated that it intends to legislate, should it form the next government, to impose a 50g CO2 per KWh maximum carbon intensity for the power generation industry (compared to c.500g now) by 2030. Such a policy would re-enforce the existing targets.
The Liberal Democrats have of course held the energy brief in the current coalition government so are highly unlikely to signal a change of course. The Conservative party voted overwhelmingly in favour of both the Climate Change Act and the Energy Act and whilst Mr Paterson's speech indicates some growing dissent from within the party the chance of a radical shift in policy direction appear slim for now.
The Conservatives have indicated that, should they win a majority, that support for on-shore wind would be curtailed but have not suggested that they would move away from either the 2020 renewable target or the 2030 emission reduction target. However the rise of UKIP, who propose to abolish 'green levies' may force the Conservatives to a more sceptical stance on current policy, especially support for renewables.
The Liberum View
Mr Paterson's speech is worth noting by the capital markets as it indicates that the current political consensus on energy policy maybe be challenged going forward. In our view the public and political debate is only likely to grow as the inherent contradictions and unforeseen negative consequences of the current policy become more apparent as time goes on. We have long argued that current EU / UK energy policy is deeply flawed and that utility companies and public market investors should be wary of committing further capital to support and deliver it. Advice which has been increasingly accepted in recent times. After all, an energy policy that has the Hinkley Point C contract and off-shore wind as its two flagship achievements must eventually collapse under the weight of its own idiocy.
Click on the video below to hear Peter talk about energy policy in the run-up to the UK general election in May 2012 (shot before the Scottish referendum, which he mentions).
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