UK’s Labour party proposes energy intervention

“Flabbergasted” was how one senior executive at a UK infrastructure fund manager reacted to news of Labour Party leader Ed Miliband’s recent proposal to freeze energy prices for 20 months following the next general election in Britain in 2015. Other responses expressed to Infrastructure Investor were less dramatic but typically no more supportive of the announcement.

And why would they be? After all, the UK’s energy industry requires a huge amount of new investment – much of it from the private sector. Up until now, foreign investors have been keen to come to the table – lured by the UK’s supposed “safe haven” status. In the wake of what looked like a call for forceful state intervention in British industry, that status suddenly looked considerably less secure.

Make no mistake, say asset class professionals: Miliband’s Brighton conference speech is considered likely to affect investor allocation decisions right now. With the Labour Party currently ahead of the Conservatives in the opinion polls, there is a decent chance that it will form the next government. Therefore, investors have to take the plans seriously – including the possibility of a new energy regulatory framework, which Miliband mooted in the speech. Other markets and/or sectors may now look relatively more attractive.

All this may be worrying but, on the other hand, infrastructure investors are a pragmatic bunch. They will often tell you that, as far as political risk goes, they have seen it all before. Around three-quarters of respondents to a poll on the InfrastructureInvestor.com website said political risk is the number one risk for the asset class today. Even within the narrow confines of the UK utilities sector, there are recollections of Labour’s windfall tax on “excess profits” in 1997 and – more recently – of the Coalition government’s cuts to renewable energy subsidies.

Some investors may take the view that – once in power – the Labour Party would water down or even abandon its proposals in the face of implementation challenges. Even those expecting the plans to be carried out in full may take the decision to factor this new political risk into their pricing of companies and assets rather than simply abandoning the market.

One thing is for sure: Political risk will always go hand in hand with infrastructure investing. But it will never lose its capacity to surprise.