By Tancrede Fulop, senior equity analyst at Morningstar
The recent UK and French elections have stirred up conversation, with the long-shunned Labour party now standing to be a party of ‘change’, while France is in political limbo.
Europe still remembers the impact of the energy crisis following the breakout of the Russian invasion of Ukraine, especially with many struggling from a prolonged period of economic hardship. This is all while we continue to edge closer to 2030 – the deadline for us to meet our pledges to achieve net zero.
With all of this in mind, and with new governments in power, we look at what this means for the utilities and renewables sector – a sector with direct correlation to many of the issues governments have been presented with.
Unlike in 2019, the Labour party’s manifesto does not present any threat to the utility sector, and is instead in line with the energy policies of the previous governments. Assessing the manifesto of the winning party, ambitious targets have been set for renewable energy to work towards net-zero targets by 2030. This includes plans to extend the lifespan of nuclear plants and maintain gas-fired power as a key element of energy security.
A notable new initiative proposed by the new government is the creation of Great British Energy, a publicly-owned company that will partner with industry and trade unions to co-invest in leading clean power technologies and promote local energy production for community benefit. This company will receive £8.3bn in public funding, and Morningstar does not anticipate that it will threaten the profitability of existing utility companies.
Likewise, in the water sector, Labour intends to empower the watchdog Ofwat to sanction executives who fail to meet environmental standards, further committing companies to net zero targets. There are currently no measures aimed at capping regulated returns or dividends. On 11 July, Ofwat will publish its draft decision regarding the features of the next five-year regulatory period (AMP8) starting in April 2025, which will be a key event for the sector.
On the bottom line, the Labour party’s manifesto should not affect the sector’s main drivers, those being regulatory periods for water and energy networks, wholesale power prices and prices of yearly auctions for renewables. Therefore, the Labour party’s landslide victory is neutral for major UK utilities like Centrica, SSE, United Utilities and National Grid, and European utilities with significant exposure to the UK like RWE, Iberdrola or Orsted.
In France, the left-wing coalition unexpectedly won the most seats in the parliamentary elections but fell short of an absolute majority. The hung parliament, with three major blocs proposing opposing policies, makes it challenging to form a majority government. A possible scenario is an alliance between Emmanuel Macron’s centrist party and MPs from the centre-left and centre-right. The Rassemblement National is expected to be excluded from the government. This means that France’s exit from the European power market – a key aspect of the party’s ambitions – is unlikely to be implemented. Likewise, the left-wing coalition’s most radical measures like price controls on essential goods including energy, automatic wage indexation to inflation and massive increases in public spending and taxes have a low chance of being enacted.
Therefore, the French election results pose no material threat to the profitability and running operations of the two largest French utilities, Engie and Veolia. Both companies remain undervalued in the market, trading below their levels before Macron called for snap parliamentary elections on 9 June .
Although elections and political movements can certainly impact markets, we see the renewables space as secure, with net-zero targets still locked in, prompting further engagement for the sector.
