The General Election campaign was hardly short of energy policies and several pages of party manifestos were dedicated to the parties’ respective plans for the sector. The Conservatives may have fallen short of an overall majority, but they look set to form a government with support from the DUP, so their manifesto still provides the most useful guide to what we can expect in terms of a policy agenda in the near future.

Despite the current turmoil in Westminster, the political narrative is favourable for pro-competition/pro-consumer downstream companies as well as those involved in developing new infrastructure. If there is an emerging political risk, it is for some new power generators. Those that can deliver energy for a competitive price or put together a business case that shows a clear financial benefit for UK plc should still make safe investments for energy investors.

Impact on the retail market

The price cap was the Conservative party’s energy policy that attracted the most attention, so perhaps that’s the best place to start. It was initially announced on 8th May following a number price rises – and associated public outcry – from energy suppliers. The aim of the cap was to cut £100 off the average annual bill of the 17 million households on standard variable tariffs. If the policy on the cap remained this rigid it might well have had a tangible negative impact on competition and consumer engagement—with price comparison websites and suppliers both at risk.

By the time the Conservative manifesto was released, just a few weeks later, the cap had softened significantly and was reworded as a “safeguard tariff cap that will extend the price protection currently in place for some vulnerable customers to more customers on the poorest value tariffs”. This is now expected to not save households as much as was initially expected, and perhaps only apply to the 2.2 million Warm Homes Discount customers. This more limited intervention is likely to have a much more muted impact on the market.

The DUP is supportive of further downward pressure on bills and Labour had proposed a cap of its own so it is likely that they could get this through parliament without too much opposition. The bigger hurdles are within the Conservative Party. A number of members were said to be against the cap, with some stating so publicly. And Theresa May’s co-chief of staff, Nick Timothy—a key proponent of the cap along with the rest of the ‘ordinary working families’ agenda—handed in his resignation over the weekend following the poor election campaign. His resignation means one less influential supporter and, with its association with the now toxic ‘old May’ operation, there is a reasonable chance that it could be quietly dropped altogether. Perhaps using the switching sites investigation and Cost of Energy review as an excuse—more on these in a minute.

What is just as important to retail market investment as the softening of the cap is the renewed commitment to competition within the manifesto. There had been concern that the Conservative Party was rowing back from its neo-classical competitive market ideology and in response they have gone to great lengths to show that this isn’t the case. In the very same paragraph as the softened price cap the manifesto adds support for “the competitive element of the retail energy market by supporting initiatives to make the switching process easier and more reliable.” It also goes further to recognise the contribution of competition at not just keeping prices down, but in encouraging new product developments. Something that a cap wouldn’t do.

The manifesto also proposes a new investigation into switching sites to see how they “can better serve competition”. The CMA, as the government’s competition regulator, is probably most likely to be appointed as the investigating body and their previous energy market review provides a good insight into how they might approach it. Here they recognised the importance of price comparison services having a viable business model and made recommendations to encourage that, even in the face of strong backlash from several newspapers.

With a significant row back on the price cap and a re-commitment to competition, the overall political risk to assets in the retail environment looks low, and if anything, the investigation will bring new opportunities to strengthen the competitive market.

Impact on the upstream market

Renewables are still in vogue and the Conservatives have retained the UK’s carbon reduction commitments, as have all other main parties. But this time new projects will have to make business sense for government as well as investors. The manifesto is unashamedly bold in this approach. It openly says “we do not believe that more large-scale onshore wind power is right for England, we will maintain our position as a global leader in offshore wind and support the development of wind projects in the remote islands of Scotland, where they will directly benefit local communities.” This tallies with offshore wind costs having fallen much quicker than was initially expected.

The Conservatives were also the only major party to talk up shale gas. It’s not a renewable, but is significantly less polluting than coal or oil and it is likely to be a big part of the solution to minimise energy prices while meeting carbon commitments. In fact, assuming they can pass the necessary legislation, it’s certain to be. “Pushing down prices”, “rebalancing the economy”, “reducing carbon emissions”! Just some of the praises laid at the altar of the Conservatives’ new wonder-gas. They even refer to its impact in the US as a “revolution” and have plans for a Shale Wealth Fund. What is conspicuously absent is any mention of the gas’s role as a tax raising cash cow. Or should that be magic money tree? Make no mistake, this is a big driver behind the policy and it’s a strong one.

The Conservatives propose a whole swathe of legislative changes to boost the industry but the opposition block—namely Labour, the Lib Dems and the Greens – are all vehemently against shale. There is also significant opposition within the Conservative party as it’s a particularly heated issue on the ground and a potential vote loser. The SNP has just closed a consultation on fracking and while they say that it doesn’t advocate a preferred position or policy, consultations only happen when governments really do have a preferred policy.

Despite the potential opposition, government is likely to push for its shale “revolution”, probably helped along by large giveaways to the affected communities. If it does pass, it will open up several new investment opportunities.

In total contrast to the praise of shale is the conspicuous absence of Hinkley Point C, or in fact any mention of nuclear that isn’t a warhead. And this is in a manifesto that reaffirms commitments to arguably more controversial infrastructure projects like HS2 and Heathrow Airport expansion. Nuclear is simply very expensive – there’s not a single nuclear power station being built anywhere in the world at the moment without a government subsidy. Government enthusiasm for nuclear seems to have cooled and investors should exercise caution when approaching the market.

The cooling nuclear enthusiasm is part of a wider “business sense” narrative where Government is looking more closely at value for money from new energy generation. This is perhaps best summed up by the manifesto’s new Cost of Energy review, with its distinct lack of restricting criteria. Previous reviews were generally limited to the retail end of the market. But, taken in the context of the manifesto and broader political narrative, this would be expected to be a holistic review including elements such as generation, renewable subsidies and network maintenance costs.

And so, the upstream end of the market in general is likely to come under greater scrutiny than it has for a long time. Onshore wind in England no longer looks favourable and projects that require larger subsidies, including nuclear, are going to be most vulnerable. The Cost of Energy review may also expose transmission and distribution to greater scrutiny, given that it constitutes 25% of energy bills—an area that had not only brought comfortable returns to investors, but previously did so without drawing too much political attention. Despite this, the upstream environment looks generally positive. The Conservative approach is logical and assets with strong business cases will continue to represent good investment opportunities.

Looking across the sector, the political future isn’t too dissimilar to where we started following the 2015 Conservative victory—a competition driven retail market with measures to maximise the benefits to consumers whilst protecting the most vulnerable. This is being coupled with efforts to meet carbon reduction obligations and secure the energy supply while minimising costs to end users. Getting to that future may not be smooth sailing, as new reviews and investigations always bring risks, but it is a future that on the whole looks bright for investors.