The UK government has announced a windfall tax on electricity generators, which would include renewable and nuclear generators, while annoucing plans to legislate on reforms of Solvency II, which could unlock more institutional capital for infrastructure.
Chancellor Jeremy Hunt announced the 45% levy on “low carbon electricity generators” as part of a range of measures in today’s UK budget autumn statement.
The existing energy profits levy on North Sea oil and gas operators is also being raised from 25% to 35%, which combined is expected to raise £14bn (€16bn) for the UK Treasury next year.
In a report released this week, EDHECinfra argued that investment in renewables was likely to become more risky and said that recent announcements “on capping renewable profits show that renewables are not exempt from the type of intervention more commonly seen in the oil industry”.
The report said: “Supportive regulation has been a cornerstone of the renewables’ success story and we argue that current market challenges cannot be solved by emergency fiscal measures.”
Last summer, Daniel Hobson, investment director at GLIL and head of real assets at Greater Manchester Pension Fund, wrote in IPE Real Assets: “It is vital that the government sends the right signals to investors. Sadly, the very recent consideration of a blanket retrospective windfall tax on energy producers has significantly weakened the case for investment in the UK.”
Hobson went on to say: “Investors prefer stability. They want to operate in a predictable and consistent regulatory, legal and fiscal framework. The mere suggestion that a retrospective tax on electricity generators is an option may be enough to deter pension funds from investing in UK energy.”
Meanwhile, the government said it would legislate on proposed reforms of insurance company regulations, which are currently in line with the EU’s Solvency II rules.
Hunt said the reforms would “unlock tens of billions of pounds of investment for our growth-enhancing industries”, including infrastructure.
Amanda Blanc, group chief executive of Aviva, said: “This is a very welcome boost for UK investment. We estimate reforms to Solvency II will allow Aviva to invest at least £25bn over the next 10 years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects.”
Hannah Gurga, director general of the Association of British Insurers, said: “We strongly welcome these changes to the Solvency II regime, which will allow the UK insurance and long-term savings sector to play an even greater role in supporting the levelling-up agenda and the transition to net zero.
“Meaningful reform of the rules creates the potential for the industry to invest over £100bn in the next 10 years in productive finance, such as UK social infrastructure and green energy supply, whilst ensuring very high levels of protection for policyholders remain in place.”
Andy Briggs, CEO of Phoenix Group, said: “The proposed reforms to Solvency II announced today present a very significant opportunity to ensure more private-sector capital can be directed by insurers into the real economy and ensure we better mobilise the UK’s £3.4trn of pension wealth.
“These regulations are an important component of the changes needed to the wider UK investment landscape which will enable Phoenix to meet its ambition to invest more in the future.
“Phoenix plans to invest £40-50bn in illiquid assets and sustainable investments over the next five years to support house building, green energy, and local communities across the country without compromising policyholder protection in any way.”
The UK real estate investment industry has also been pushing for reforms to include changes to the way the volatility and risk of real estate are calculated.
The British Property Federation (BPF), Association of Real Estate Funds (AREF), European Association for Investors in Non-Listed Real Estate Vehicles (INREV) and the Investment Property Forum (IPF) submitted a joint response to the government’s consultation, arguing that their proposals would unlock more institutional capital to support its ‘levelling-up’ and net-zero objectives.
The government also said it would continue to invest in the country’s infrastructure and proceed with a second round of its ‘levelling-up fund’, at least “matching the £1.7bn value” of round one.
Roger Clarke, the CEO of real estate stock exchange IPSX, said: “It is absolutely right that the government should continue to prioritise improving Britain’s infrastructure, transport and quality of housing by levelling up the imbalance between London and the regions, and a recommitment to allocating £1.7bn to priority local infrastructure projects via the government’s levelling-up fund is welcome.
“But public investment is only one piece of the puzzle; the private sector, and particularly the real estate industry, has an equally important role to play in supporting the regions’ growth by creating more opportunities for local development and regeneration.”