A Brexit dividend - will Net Zero benefit from a new wave of investment by life insurers?

The insurance business model involves using premiums to make investments that achieve a financial return while maintaining sufficient liquidity to meet claims on policies. For the last six years, insurers across Europe have followed Solvency II, a package of measures designed to regulate how insurers operate, with an emphasis on solvency and liquidity. Post EU exit, these rules have been under review by UK Government.

Infrastructure assets generate long-term, predictable cashflows — often inflation-linked — making them ideal matches for a life insurance liability.

Insurers invest in infrastructure, typically with the intention of holding them to maturity. Therefore, the industry has struggled with a regulation regime that punishes illiquidity, particularly as it excludes such assets from an initial recognition of profit on the predicted risk-free return through a “matching adjustment.”

As part of the Autumn Statement, the Government published its decision to significantly loosen those rules but accompanied by greater monitoring undertaken by the industry watchdog, the Prudential Regulation Authority.

The new regulations will extend eligibility in a number of ways that benefit both infrastructure and renewables assets, including

• allowing assets with highly predictable cashflows alongside those with fixed cashflows
• including assets that are below investment grade, removing the “BBB cliff” that favoured portfolios without BBB-, the rating of many infrastructure and renewable assets
• allowing matching to apply to assets with construction risk, if normal mitigations, such as liquidated damages for delays, are present

The timing of this is welcome. The Government’s 2021 Net Zero Strategy, “Build Back Greener”, forecasted an overall need for £90bn of private investment by 2030 but was declared inadequate in the summer by the High Court as its policies lacked timebound, measurable targets.  

Visible, timebound regulatory changes, such as banning gas for newbuild homes and introducing zoning for heat networks by 2025 and banning petrol and diesel cars from 2030, are already mobilising significant investment in the heat networks and EV sectors. 

With a revised publication date of March 2023, this improved strategy could provide the ideal framework for those insurers currently restricted by Solvency II to plan how more of the future premiums we pay for life and critical illness insurance may be targeted toward long-term infrastructure that helps address climate change.

Written by Neil Rutledge, Amberside Advisors

Energy Efficiency Task force: a little reminder from 1944

Thursday’s Autumn Statement included the news of the establishment of a new task force focused on achieving energy efficiency across the UK in order to hit decarbonisation and energy consumption climate goals.

The cynic in me was slightly underwhelmed. To coin a phrase, the road to hell is paved with well-intended Government task forces. However, this task force is being funded to the tune of £6 billion between 2025-2028, in addition to the £6.6 billion provided in this Parliament. This is a sizable commitment in anybody’s estimation and a significant step towards actually doing something about reaching our net zero carbon emissions targets.

But what comes next? What could stop this admittedly well-resourced task force from falling by the wayside, like so many others before it?

It strikes me that two things are needed to set this task force on its way. One, it needs to be comprised of the right people. But how do you know who the right people are? Well, that relates to the other thing: define the problem that needs solving.

Simply put, hitting our net zero goals is about behavioural change on a mass scale. It’s about change. It’s about communication. It’s about engaging, influencing and nudging. And it’s really not about education, technical solutions or financial incentives.

Britain is no stranger to large-scale public behavioural change programs. A quick hunt around the British Film Institute website reveals an archive (available for free) with a positive goldmine of public information adverts, many of which will bring a nostalgic tear to the eye of anybody over the age of 30. There are campaigns around safety, health (“AIDS, Don’t die of ignorance” probably being one of the most famous) and everything in between. And in 1944, there was a public information campaign solely focused on energy usage and consumption. Admittedly, advising people in this day and age to only use one lump of coal and not two may seem slightly outdated, but looking at this campaign through the eyes of 2022, much of it remains relevant: turn off devices that you’re not using, cook efficiently where possible, and make sure that you don’t waste heat unnecessarily.

If we look through a communication ‘lens’ at the job to be done, then essentially, the Government has a very large audience that is going to need convincing to change their habits around energy usage.

In the communication world, the first step is to segment your audience; understanding the different groups within our society that need to be influenced is essential before appointing people or organisations to the task force assigned with that job. There are literally millions of teenagers and twentysomethings who, as TikTok users, are influenced by individuals completely unknown to great swathes of the older population. Yet there will also be another segment of UK society to whom you could show the 1944 public information broadcast, and that would be enough to trigger the emotional connection of ‘pulling together to achieve a common goal’. 

To me, as a 40-something working mother, having an organisation such as Mumsnet, or an individual such as Martha Lane-Fox, stand up on the task force and talk to me as an adult, honestly and openly, about the compromises I’m going to need to make in terms of inconvenience and loss of time (inhales sharply) in order to make more effective energy choices, will have a lot more impact than a politician lecturing me, and who is only on the task force by virtue of not getting on “I’m a Celebrity, Get Me Out of Here!”.

The Government is going to need to think laterally to build a relevant and effective task force that can both define the problem and develop utterly ingenious ways to solve it. If it was me and my £6 billion, I think one of the first appointments to the team would be Apple. I’d get them building a branded gadget or a widget or a gizmo at top speed; it doesn’t need to actually make a significant difference to climate change (although that would be nice), it just needs to have £1m of advertising behind it to make it ‘the’ thing to have as an ‘authentic’ climate activist, and I’m pretty sure a chunk of the population would be on board with reducing energy consumption. 

But I’d also have a historian on the task force too. There is a mountain of historical learnings around what works when looking to change public behaviour (“Next slide please…”) – and more importantly, entire mountain ranges of information on campaigns that haven’t worked. It would be good if we could use some of that hard-won insight in this endeavour.

(And I would definitely have a working parent; these people know how to get stuff done!)

The detail needs to be worked out. But I remain hopeful, no matter what the quality or political persuasion of the current government. Putting it bluntly, HM Treasury does not allocate £6 billion to anything that it doesn’t feel has a real chance of making a difference to society. We just potentially need to look backwards in order to move forwards.

Written by Kathryn Middleton, Amberside Advisors

New Electricity Generator Levy poses a risk to renewables investment

As expected, the Autumn Statement extended energy windfall taxes beyond the oil and gas industry to include low-carbon electricity generators, both renewables and nuclear, aiming to raise over £14 billion through a new Electricity Generator Levy. Although set at 45% of 'exceptional generation receipts', the proposals are less harsh than those trailed beforehand and have done little to dent the share prices of large UK energy companies such as SSE. What it does do is introduce further uncertainty for investment (and government ambition) in UK renewables beyond offshore wind.

The levy comes into force from January 2023 until a not-so-temporary 2028. Electricity sales above £75/MWh pay an additional 45% tax. Only larger generators are included (e.g. a 100MW solar farm), and a £10m annual allowance applies before the levy kicks in. Given fixed revenues, those with Contracts for Difference are excluded, but a glaring omission is the 40% of UK generation from gas.

How much impact this will have on investment will be clear over time, but alongside the effect of the rates revaluation of solar and wind assets that takes effect next April and major regulatory changes coming, this won’t make it easier to deliver the £50 billion a year of investment that the Government’s advisors, the Climate Change Committee, say is needed by 2030.

Reaction from the renewables sector has been negative, and whether the levy raises the £1 billion this year (to March 2023) and £4 billion next remains to be seen. However, the UK Government's ambitions, as set out in the Energy Security Strategy, such as solar capacity tripling by 2030, are only going to be met if short-term actions start aligning with these more strategic goals.

RenewableUK's CEO, Dan McGrail, said: "This windfall tax on low-carbon power risks deterring investment at a time when the chancellor should be incentivising clean energy. Unlike in oil and gas, under this levy, companies that are making significant investments in renewables will get no tax relief and will be hit by a higher windfall rate."

Written by St.John Hoskyns, Amberside Advisors