‘The wrong signal’: investors respond to the UK’s fossil fuel push

The UK government released significant changes to its energy policy last week, from pledge to “max out” oil and gas reserves in the North Sea over granting hundreds of new oil and gas licences to changing its carbon trading scheme to grant more allowances to heavy polluters.

The announcements came as the government met with representatives of the energy sector to attract more private investment in UK energy infrastructure.

The government said that while it remained committed to net zero, even in 2050, a quarter of the UK’s energy would still be derived from oil and gas.

While advocates of the proposals herald this a step towards reducing the reliance on energy imports, critics warn that they represent a step backwards in the UK’s transition to net zero.

James Alexander, CEO of the UK Sustainable Finance Association (UKSIF), described the government’s plans as the wrong signal to investors: "For large-scale capital to flow to low carbon technologies and climate solutions, policymakers must build investor confidence by demonstrating their commitment to delivering a sustainable future, with all the economic benefits this brings.”

Alexander also emphasised that the International Energy Agency has advised to cease any new funding of oil and has projects, if the world is to reach net zero by the middle of the century.

No impact

One institutional investor in energy infrastructure is GLIL, an infrastructure platform for LGPS investors and DC Master Trust Nest. 

The fund is among others a major investor in Hornsey Windfarm, energy storage firm Flexion Energy and Cubico wind and solar sites across the sites.

Chief operating officer Ted Frith emphasises that the government’s recent turn towards fossil fuels is not impacting GLIL’s strategic asset allocation. 

“GLIL has never invested in fossil fuels infrastructure and has no plans to do so now” he stresses.

Frith is also confident that the strategy goal for net zero by 2050 remains in place, making renewable energy a more attractive investment proposition for long-term investors, he argues: “As a long-term investor working with pensions funds, we look for assets that we believe will offer an extended lifetime across multiple political cycles. For us, renewable energy remains a central part of that approach.”

Policy risks

This perspective is also echoed by Tessa Younger, Better Environment Lead at CCLA. She warns that government intervention or policy changes are seen as a key risk for investors in renewable energy.

“Periods of uncertainty don’t help promote greater investment in renewables. This is something we saw last year, as there was a sustained period of uncertainty around how the government would structure the Electricity Generator Levy, and therefore what the impact would be on renewable energy generators.”

Younger also warns that the investment case for hydrocarbons is waning: “We see this as a fundamentally challenged sector as the consumer and industry shift to alternative energy sources and improve energy efficiency. It is capital-intensive, with long lead times on projects, high cyclicality and over time poor returns on investment.”

In contrast, she remains optimistic that investments in renewable energy remain more attractive in the long run. “Despite the granting of new licences for oil and gas projects we believe that investment in renewable energy assets is still attractive for the following reasons: new projects can be developed at attractive IRRs, operational projects benefit from government backed subsidies with inflation linkage, and the projects generate strong cashflows resulting in an attractive yield” Younger argues.

Over the last two years, UK government investment in renewable energy has dropped by 10% from $31 in 2021 to $28bn in 2022. At the same time, institutional investors continue to commit capital to the renewable energy transition.

Some 68% of institutional investors in the UK plan to invest more in renewable energy assets, according to a survey by Alpha Real Capital. 

Examples are the LGPS pool Border to Coast, which in its latest Climate Report said it had invested more than £8bn in climate solutions, DC Mastertrust Nest and USS, the UK’s largest DB fund, which have invested in renewable energy in the UK.

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