Ed Miliband’s grand scheme to fix energy prices has gone down like a lead balloon in the City. Some £2bn was immediately wiped off the value of Centrica and SSE. And star fund manager Neil Woodford called it outright economic vandalism.
It surely gives every investor pause for thought. Political risk is still very much on the table – even when the politicians aren’t in power!
Whitehallers always seem to think they’ve got the solutions to the problems that they themselves created. I’m not getting all party political here – practically all sides of the House were up for implementing the policies that have caused energy costs to soar.
The fact is, though, that North Sea oil revenue has been leeched by central government for decades now. Taxes have driven away investment, causing supply constraints that have driven up prices. Then there’s the weak pound that purchases little in the global energy markets – again, this is a product of central planning.
Markets hate this kind of uncertainty. And that makes investing in one of my favoured sectors – utilities – a little tricky. But don’t worry, there is a way to avoid these political pitfalls.
They don’t have a good record here
When is it right for a government to intervene in economic matters? Well most economists would say it’s right and proper for government to intervene when it comes to ‘externalities’. An externality is something like pollution – an industrial side-effect that affects people that didn’t get any economic benefit from its creation.
Unfortunately, central planners don’t have a good record of dealing with these sort of problems. Take the drive to limit global warming – that has lead to government backing for a truly ludicrous scheme to subsidise solar panels all across this green and pleasant land.
Don’t get me wrong – I’m all for renewables. I totally see that we must invest in a future not so dependent on fossil fuels. But the economics of the scheme put forward was just bonkers. Putting solar panels on domestic roofs was so uneconomic that they had to offer massive subsidies to homeowners to make them invest. Basically, electricity produced by homeowners is worth something like 5p per Kwh to the national grid. Yet, the electricity companies are forced to pay 41p for the stuff, even though it’s getting used by the homeowner whose roof the panels sit on!
And who ultimately foots the bill for this subsidy? Consumers do of course – the leccy company has to make someone pay!
If government is supposed to intervene in inefficient markets (externalities), then for heaven’s sake, surely they should introduce reforms that make the market more efficient, not less. Actually, given the cost of these things, it wouldn’t even surprise me if the carbon footprint of these installations were bigger than what they save in the long run. Anyway, back to Miliband.
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Why Miliband’s scheme is cracked
Miliband’s idea of fixing prices spotlights once again a politician who doesn’t understand markets, and lacks the imagination to put things right.
If you want to efficiently capture the sun’s energy, then why not do it somewhere sunny? Take the south of France, where you’ll find acres of useless vineyards. In fact, in many areas, the landowners are paid to not to produce grapes! They’re heavily subsidised to let the land lay fallow – of course this is the product of political interference on an EU scale.
The point is, this land is ripe for the solar industry. Wouldn’t it make sense to make solar farms? Think about the massive efficiencies of farming electricity on a grand scale.
So why on earth are our engineers scrambling about on cumbersome roofs, putting in place tiny installations, yielding barely enough leccy for a toaster – which are prone to breaking down anyway?
And before you tell me the French wouldn’t have it, then just consider the fact that French companies are practically running the UK nuclear fuels market already. German companies are all over our utilities too. And if we don’t set up shop in France, then why not somewhere else? Whatever we do, it has to be done on a scale and in a place that’s efficient.
Miliband is looking at the wrong problem. The problem of price is a knock-on effect from supply issues caused by political mismanagement.
So, what’s an investor to do?
As it happens, I’m a big fan of investing in utility companies. The only problem is, they’re always going to be operating in a political minefield. Anytime you’re digging stuff out of the ground, there’s always a taxman on your back. And when your products have a big effect on voter finances, you’re going to attract the ire of the political masters.
Nonetheless, in mid-April, I talked about a very interesting utilities play – the EcoFin Water and Power opportunities fund. Read about the risks and the reasons why I would consider investing here.
One of the great things about this fund is its global diversification. The fund manager allocates funds to different countries and utility companies considered the best long long-term bets, given the individual political climate.
Right now, 10% of the fund is invested in a Texan shale gas operator. Probably a safer political bet than Sussex!
15% of the fund is invested in emerging markets, with 6% in exciting renewables in China.
The fund has been underweight UK utilities, saying that our operators are looking a little pricey, and, rather presciently, citing potential regulatory concern.
Offering a yield of 5.5%, and (to my mind) some decent inflation protection, many income seekers will no doubt be interested. If so, you can download the August fact sheet here.
Political interference is nothing new. And though at times we seem helpless against it, it’s always worth considering the global approach. Sometimes it’s best to allow a professional investor, with a broad overview of the political landscape and the scope to allocate your funds accordingly.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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