09 Mar 2016

Petrol on Fire: The combustible mix of the EU referendum and the Conservative leadership race

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Politics Insight


If the Remain campaign either fails in its objective of keeping Britain within the EU or only succeeds in a manner than does not really settle the matter, then one incident or moment might be decisive. That event, though, is not one that has occurred since the referendum date was settled. It may well be instead the instant that the BBC aired its interview with the Prime Minister almost one year ago, on 24 March 2015 at the outset of the election campaign which would trigger the EU referendum.

For it was in that televised conversation with James Lansdale, the BBC’s Deputy Political Editor (and an old school chum from Eton College) that David Cameron chose to raise a subject that he did not have to. Dressed down in a black shirt and blue jeans (very 1980s) and cooking in the kitchen of his constituency home, Mr Cameron took a break from chopping carrots for the camera and in a style almost as casual as his attire declared that if he secured his re-election to Downing Street he would not seek a further stretch in office thereafter. Terms in office were, he expounded, “like Shredded Wheat”, two of them would be nice but three would prove excessive. Having outlined this extremely novel breakfast cereal theory of contemporary electoral democracy, he resumed slicing vegetables.

There was always an obvious risk involved in such a statement. It was that as soon as the promised EU referendum had been conducted, the single biggest question in British politics would become the timing of Mr Cameron’s departure and who would succeed him as the Conservative Party leader and hence Prime Minister. There was the danger that having announced so early that he would not be a figure in the 2020 election, Mr Cameron would become something of a lame duck from whenever in 2016 or 2017 the referendum exercise had ended and might even find himself obliged to step down earlier than he really wanted to in order to avoid the embarrassment of his authority evaporating.

What was not, however, appreciated at the time and, indeed, not until very recently, was the extent to which the referendum campaign could itself become entwined in that struggle for the leadership of the Conservative Party, rather than serving as the prelude for this competition. It may not have done so were it not for another development which, in fairness, Mr Cameron could not possibly have anticipated in March last year (because no one else did), namely that Jeremy Corbyn would be the next Labour Party leader. That outcome has left many within the Conservative Party convinced that it can engage in a full-blown, bitter split over EU membership and fire the starting gun on its own leadership election through the medium of the referendum, without there being any serious chance that this combination of fratricide and introspection would invite a defeat in 2020.

Hence we are where we are, which is not where Mr Cameron expected to be. The referendum thus presents different political challenges and incentives to the three most probable contenders for the Conservative Party leadership (George Osborne, Boris Johnson and Theresa May) and for any others waiting in the wings in case one of this trio is not in a position credibly to enter the competition.

George Osborne needs a big Remain win or he is potentially a busted political flush

The fortunes of the Chancellor are symbiotically linked to those of Mr Cameron. More than any of the other potential candidates for the leadership, Mr Osborne has no choice but to agree with and to echo absolutely everything that the Prime Minister says and does on behalf of the Remain cause. He has no room whatsoever for political product differentiation. Nor can he do what Gordon Brown often was accused of doing whenever Tony Blair was at moments of extreme political pressure (such as over the Iraq War and then university tuition fees) and make himself invisible.

This fact, combined with some signs of a slowing economy, has led to a steep fall in his political share price over the past four months. He also faces the test of a Budget next week where, as his retreat on a radical plan to reform pension tax relief for high earners indicates, he cannot afford to do anything which makes the Government unpopular either with Conservative MPs or the public at large. He has to hope that the forecasts of the Office of Budget Responsibility will, once again, come to his political rescue.

Mr Osborne needs a big Remain win, one of a scale so that it is absolutely clear that the majority of Conservative voters (and ideally Conservative Party members) have followed their leader’s advice. A victory of that type does not ensure that he will replace Mr Cameron but it is a basic precondition. If the result is a narrow endorsement of continued membership then that probably means that a small but significant majority of Conservative voters (and almost certainly more than half of members) had cast ballots to leave the EU, but had been outnumbered by a solid centre-left majority to stay with it.

That would be a very uncomfortable outcome for the Conservative Party as a whole and it may also imply that a candidate as closely associated with the Prime Minister as Mr Osborne is would be too divisive an individual to entrust with the leadership. Those in the party mainstream may well ponder whether Sajid Javid, the Business Secretary, and an Osborne protégé, would be more acceptable. If the Leave lobby won the referendum, Mr Osborne’s chances of becoming leader would be minimal.

Boris Johnson needs any option short of a big Remain win to remain a viable alternative

The Cameron entourage appears to have been genuinely surprised and shocked that the Mayor of London has deserted them on this issue. They should not have been. If Boris Johnson had backed the Remain campaign then his already relatively fragile position in the initial vote of Conservative MPs in the leadership election when it comes would have been badly eroded. He would have ensured that a Thatcherite candidate entered to the right of him, which would have inflicted real damage on him.

As it is, that possibility looks more distant. Boris has made himself the de facto leader of the right of the Conservative Party and, bar a very strong performance for Remain in which most Conservatives have manifestly opted to back EU membership, his chances are enhanced by his act of positioning. Indeed, allowing for the strong (but unproven) suspicion that his private enthusiasm for departure from the EU is tepid, the optimal political outcome for the Boris Brigade would be a narrow vote to stay in the EU with a majority of Conservative activists, members and voters backing a withdrawal. In this scenario, Mr Osborne would be nearly fatally wounded, opening the door to No 10 to Boris.

Theresa May, though, has the most flexibility on the referendum of the three candidates

Unless, that is, it is the Home Secretary rather than the Mayor of London who ultimately benefits. Ms May is an underestimated political operator. She was never realistically going to opt to take the helm of the Leave campaign, which would have neither suited her middle-of-the-road outlook on politics nor made much strategy sense in terms of her ambitions. She has been loyal to the Prime Minister and stuck with the ‘establishment’ stance inside her party but has the freedom to take as prominent a role in the campaign as she wishes and to set her own tone by, for instance, arguing that the UK should stay in the EU but that both the UK and the EU need to do far, far more to take control back over their borders. In short, she can back Remain but use the language of Leave too.

Astute observers of the political scene should take careful note both of her volume and vocabulary as the referendum campaign advances. There are few better weather vanes than Ms May when it comes to assessing party sentiment and the probable national numbers. She will also be the one in the aftermath of the vote making the case that unlike her two more polarising rivals in the race, she is the leader who can ensure that the Conservatives do not end up like one of Mr Cameron’s carrots.

Tim Hames, Director General, BVCA


Sector Insight

Investor Confidence in the Energy Sector: Review of the DECC Select Committee’s Report

On the 3 March 2016 the House of Commons’ Energy and Climate Change Committee published a report on investor confidence in the UK energy sector. Whilst select committees often produce such findings that are relevant to their sectors, this report has added significance due to the precarious and unstable state of the energy sector over the past year. The ongoing turmoil in global oil markets has of course generated a growing sense of unease and anxiety amongst producers and supply chain businesses, but it is the seemingly retroactive shift in government policy across a range of sub-sectors, notably renewables and particularly onshore wind and solar, that has further undermined investor confidence.

Indeed, the Committee’s report found six principal factors that have combined to damage investor confidence. These include sudden and numerous policy announcements; a lack of transparency in the decision-making process; insufficient consideration of investor impacts from policy changes; policy inconsistency and contradictory approaches; the lack of a long-term vision for the energy sector; and the risk of a policy “cliff-edge” in 2020 due to the lack of visibility of the Government’s agenda beyond this date. The report thus raises some profound questions, namely, what should investors expect over the coming years and how best can they mitigate potential risks to ensure projects are delivered and returns are secured.

Venture capital and private equity investors will no doubt be aware of how important it is that the Government provides transparency and clarity, within a predictable and stable policy framework, and no more is this true than in the energy sector. As the report rightly argues, energy projects are by their nature long-term endeavours, with the investment process often spanning multiple parliamentary terms and in many cases taking more than a decade to reach completion. If investors are to remain confident and willing to back long-term projects – and this is essential if the UK is to secure a sufficient supply of energy whilst meeting its international obligations on climate change and carbon emissions – then the Government evidently has to do much more to reassure the investment community, perhaps by re-evaluating its current agenda.

Taking into consideration the Department for Energy and Climate Change’s (DECC) own estimates that Britain will need £100 billion of investment in energy infrastructure by 2020, it is deeply concerning that there does not appear to be a coherent policy framework in place to ensure that this target is achieved. Since the general election in May 2015, there have been a series of announcements that have regrettably lacked adequate timescales for consultations and reviews. For instance, the Government’s decision in the autumn to cancel the £1 billion Carbon Capture Storage (CCS) scheme, with only an hour’s notice given to investors and the industry, gave the impression that the Government was pursuing a near-retroactive agenda without consulting those companies operating within the sector. It also raised questions about the credibility and indeed viability of the Government’s targets to cut the UK’s carbon emissions as set out in the COP21 Paris Agreement.

Similarly, the decision not to provide a formal consultation on the earlier than expected closure of the Renewables Obligation (RO) and the change to the Levy Exemption Certificates resulted in a predictable backlash from the renewables industry, with several companies halting projects or completely withdrawing investment from the UK. The combination of several unexpected policy changes in just a matter of months has understandably left investors – whether they are involved in start-ups, supply chain businesses or industry giants – questioning the future viability of the sector.

As a previous Insight article on the renewables sector argued, one can appreciate the Government’s desire to reduce energy costs to consumers and phase out subsidies in line with growth. This desire has of course been the predominant justification for the shifts in policy since the summer. However, the Committee’s report reveals some profoundly important issues that need to be resolved. The Levy Control Framework (LCF), which the Government established in 2011 to cap the cost of levy-funded energy schemes and limit any excessive increases to consumer bills, has some notable technical flaws.

For example, DECC partly determines the cap based upon the gross costs to the consumer. This led to the Government announcing that it would reduce renewable subsidies after the Office for Budget Responsibility (OBR) projected a LCF overspend of almost £2 billion (2011-12 prices) in 2020-21, reaching a total of £9.5 billion compared with the set limit of £7.6 billion. However, increased costs under the LCF do not necessarily translate into an increased bill for consumers. The Committee’s report highlights research by the Carbon Brief website, which compared forecasts made by the Government in November 2014 and those made in May 2015, and found that although the Government had increased its forecast of the amount consumers would pay under the LCF from £94 to £104 in 2020-21, the forecast for the average total bill had fallen from £1,319 to £1,222. In other words, the net cost for consumers was actually lower, thus calling into question the necessity of the Government’s response. A notable reason for this is because the LCF overspend has largely been caused by the fall in global fossil fuel prices, with Contract-for-Difference payments to energy generators greater the lower the wholesale price. Therefore there is not necessarily a net impact on consumer bills, especially when considering that wind and solar power have the additional effect of lowering wholesale electricity prices due to their zero marginal fuel costs.

To further add to the general sense of investor uncertainty and sectoral instability, the Government appears reluctant to publicise the calculations that have underpinned its forecasts for the LCF and those subsidy regimes incorporated within it. Investors are thus unable to fully comprehend the changes in policy and are becoming increasingly sceptical of the accuracy of the LCF forecasts. As such it is likely that investors will be hesitant about making long-term investment decisions without first being able to fully anticipate LCF availability and allocation.

With Budget day fast approaching, it is crucial that the Government provides clarity, transparency and a far greater degree of certainty for the energy sector. If the Government wishes to fulfil its international obligations, successfully phase out coal-fired power stations and generate enough investment to secure the UK’s energy infrastructure, then it must review its current policy framework and provide sufficient and accurate information to businesses and investors alike. The UK could undoubtedly be a world leader in renewable and sustainable energy, but it will require a stable and supportive political environment which encourages rather than stifles investment and growth.


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