The Lex Newsletter: UK’s battered wind energy sector will renew itself

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Dear reader,

Is the UK now a hostile environment for investors in net zero technologies?

Next week’s King’s Speech is likely to revive the debate. People close to Rishi Sunak are already suggesting the prime minister will introduce legislation to commit to more oil and gas licensing.

There are other setbacks. The government failed to attract any bids from offshore wind developers in an important contract auction in September. In addition, Sunak recently pushed back the 2030 ban on the sale of new petrol cars by five years. 

But is the UK now anti-clean energy and pro-fossil fuels? Far from it. The doom-mongering has gone too far.

First, little has yet changed on oil and gas licensing. Here, companies compete for permits to explore for oil and gas in UK waters. These contests were regular events until 2019-20. Then the government paused them while it designed a “climate compatibility check” against which all future rounds would be tested. 

A new licensing competition was launched at the end of last year. North Sea regulators issued the first permits under that process this week.

Seasoned oil and gas investors know new exploration permits do not mean the North Sea’s taps will suddenly be jammed open. Exploration success is far from guaranteed. UK-focused oil and gas companies such as Serica Energy caution that any new developments will depend on future fiscal policies. 

Line chart showing the price-to-forward earnings ratio of Serica Energy since 2018

The UK’s windfall tax on oil and gas production will remain in place until March 2028. Shares in Serica and rival Harbour Energy have lost 14 per cent and 41 per cent respectively since its introduction in May 2022. Serica’s shares trade on a depressed multiple of 2.7 times forward earnings. That is hardly an indicator of overflowing confidence in UK North Sea production.

Line chart showing the share price (pence) of Serica Energy

Offshore wind has been going through a difficult time globally. The industry is beset by higher interest rates, supply chain inflation and engineering challenges. The UK’s auction flop pales into insignificance compared with the woes of two pioneers: Danish energy group Ørsted and Spanish turbine maker Siemens Gamesa. Ørsted’s shares fell by a fifth in early trading on Wednesday after it cancelled two US projects and booked a DKr28.4bn ($4bn) impairment. Spain’s Iberdrola has cancelled or sought to renegotiate power contracts for offshore wind farms in the US after costs surged.

The share price of SSE — a good proxy for UK clean energy investment — has gone nowhere in the year to date, although it is marginally outperforming the wider FTSE 100 index. 

Investors are eagerly awaiting details on the UK’s next big renewable energy contract auction, which could be released as early as this month.

Energy executives who have met ministers and officials are hopeful they have learnt from this year’s failure to attract offshore wind bids. Offshore wind developers had since the start of 2023 warned that the starting electricity prices for the auction were too low. Unlike conventional auctions, companies bid at the starting level or below.

“It’s positive to see the government recognise how [this year’s auction] fundamentally underperformed,” said Adam Berman, deputy director for advocacy at trade group Energy UK. 

Industry executives have suggested remedies. One is to raise the auction’s starting price but limit the number of gigawatts procured. Another option would be to extend tax reliefs. These could be similar to a super-deduction capital allowance introduced during the pandemic, which expired in March.

This year, offshore wind developers had to compete for government contracts with companies working on cheaper land-based turbine projects and solar schemes. Previously, offshore wind was in a separate category.

That could be reintroduced if ministers still want offshore wind to replace gas as the backbone of the country’s electricity system and become the “Saudi Arabia of wind” as Boris Johnson bombastically put it while he was still in Downing Street.

Another easy win would be to deliver on promised reforms to speed up grid connection waiting times. Some energy projects are facing delays of up to 15 years to plug into the grid.

For some investors, it would be enough not to “change things again or make things more complicated”, said Sam Alvis, director for energy and environment at consultancy Public First. 

There is no doubt clean energy investment in the UK has suffered turbulence. But fair winds will prevail again, sooner or later, as pressure to decarbonise reasserts itself.

Other things I enjoyed this week

My FT colleague Rachel Millard wrote this comprehensive and clear explainer about why the global offshore wind industry has reached an inflection point.

Helen Thomas (no family relation) also wrote convincingly about why European oil majors such as BP and Shell shouldn’t be hustled into mega takeovers after US rival Exxon bought Pioneer for $60bn and Chevron swooped on Hess for $53bn.

Outside of work, I’m entranced by Ocean Vuong’s On Earth We’re Briefly Gorgeous, a letter from a son to his illiterate Vietnamese mother who was left traumatised by war.

Nathalie Thomas
Lex writer

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