Last week the Labour Party backpedaled on a June 2021 commitment by Shadow Chancellor Rachel Reeves to invest £28 billion of public money annually in green projects.

After a week of ominous rumbling, Thursday brought news that the longstanding manifesto pledge would be slashed by some 75%, with a revised plan to spend £23.7bn over the whole next parliament, on top of an existing £10bn commitment from government.

With that comes a reduction in the scope of investment earmarked for areas like green steel, ports, hydrogen and carbon capture and storage (CCS).

The reaction has been mixed, although most appear to believe it is policy rather than public cash that is most important, with private investment willing to step in – provided planning issues are overcome and supportive long-term policies ensure certainty and a reasonable return.

Among those criticising the decision was Shauna Dubler of Dentons, who said the £28bn was “an effective commitment to lower energy bills, warmers homes, and crucially, it signalled to business that the UK was an attractive place to invest.”

She said “a significant financial commitment” would be “essential” from any new government if the UK is to demonstrate to business it is committed to being a leader in green energy.

Labour Party leader Sir Keir Starmer gives a speech, at the National Composites Centre at Bristol and Bath Science Park in Bristol. Stefan Rousseau/PA Wire

Labour for its part blamed the Conservative government for “reckless” damage to the UK economy which it says has forced a reduction in spending. But is the abandonment of a manifesto pledge by a possible ‘government in waiting’ potentially weeks ahead of a general election what prospective investors want to see?

As Energy UK boss Emma Pinchbeck noted: “The exact figure is not the issue here, it’s the signal it sends… Labour’s spending plans are a signal to the market.

“The party has been engaging constructively with business over recent months, but retaining the confidence of the market is dependent on not making U-turns that damage the UK’s attractiveness to investors.”

E3G campaigns director Ed Matthew said industry, households and local authorities needed “commitment to long-term funding and a strong regulatory framework.”

He called for a clear 10-year funding commitment, though noted that Labour was still planning more green investment than the Conservatives. “But this may not be enough to reach our climate and fuel poverty targets, and ensure we are internationally competitive… Labour will have to work hard to maximise the leverage of private investment, and back up the Plan with major tax incentives and smart regulation.”

The exact figure is not the issue here, it’s the signal it sends. Labour’s spending plans are a signal to the market.
Energy UK CEO Emma Pinchbeck

Energy consultant, Josh Buckland, played down the move. “Policy wise I really don’t think this shift matters much. Getting to £28bn never realistic in current [sic] fiscal environment,” he said on X

“More importantly, Labour’s clean power mission is all about leveraging private money, not public cash… The real issue now is whether Labour can put more flesh on the bones of how they will deliver (or more realistically get somewhere close) to their 2030 target.”

“Planning reform, business models, regulation all much more important than extra public [funds],” at least away from areas like energy efficiency and homes, he ventured.

The REA (Association for Renewable Energy and Clean Technology) said Labour’s announcement would make the decision to invest in UK renewable energy and clean technology a more difficult one, at a time when the sector has been calling for political guidance and clarity.

Implications for energy

Labour’s Green Prosperity Plan remains in place, worth around £8bn a year, according to Ms Dubler, and the lower spending means a less ambitious Warm Homes Plan says E3G. This will be cut from £6bn a year for ten years to £2.64bn per year for five years – compared to around £0.9bn a year in this parliament.

“So, while this represents an uptick from current levels, it is far below Labour’s original commitment,” said E3G’s Matthew.

In addition, Labour’s pledge to reduce bills may mean taxpayers’ money replaces the £1bn/year Energy Company Obligation fuel poverty scheme, which comes from levies on bills.

Mr Matthew said £2.5bn of funding for steel decarbonisation, from the National Wealth Fund, which was part of the latest announcement, was a welcome commitment in the first five years of a Labour government, rather than 10 years as initially planned.

Labour leader Sir Keir Starmer (centre), Scottish Labour leader Anas Sarwar (right) and Ed Miliband, Shadow Energy Security and Net Zero Secretary (left), during a visit to St Fergus Gas Terminal in Aberdeenshire. Jeff J Mitchell/PA Wire

“If Labour decides to pursue low carbon primary steelmaking, this fund may need additional capitalisation, or at least a better idea of how they will leverage a greater degree of private finance.” He added that the commitment of £1bn per year to decarbonise industrial hubs, while welcome, was insufficient, given these remaining industrial sectors made up 86% of industrial emissions.

E3G’s Matthew welcomed Labour’s pledge to decarbonise the power sector by 2030, and a focus on state owned GB Energy, which would be capitalised with over £8bn.

But with the main plank of power sector decarbonisation being offshore wind, any state operator would face many of the same supply chain constraints as private developers. GB Energy may therefore be better placed in nuclear, where it has £5bn to spend.

Going private

In the power sector, there is plenty of private finance willing to commit to green capacity and storage at the right price and provided connections are available. Well-designed contracts-for-difference (CfDs) have proven effective at mobilizing private renewables financing by guaranteeing project income per MWh, while a higher carbon price could help drive private investment in industry.

CfD prices could be raised to attract more private finance and accelerate the renewables roll out, or Labour may even consider replacing CfDs with another system – although this would further unsettle investors. As Ms Pinchbeck noted: “The vast majority of the investment needed for Net Zero will come from private businesses, but to make such commitments here in the UK when returns come over years and decades, business needs to know that politicians won’t pull the rug from under them.”

David Whitehouse, CEO of trade body Offshore Energies UK (OEUK) agreed. “The UK’s net zero journey requires serious and sustained investment. While public finance has an important role to play, the lion’s share needs to come from the private sector,” he said.

“Policymakers must now build real partnerships with industry to unlock the capital we need for a homegrown energy transition in a very competitive world. We must invest to grow jobs, make the most of our own supplies and boost our energy security.”

However, a parallel vow from Labour to impose a “proper” windfall tax on oil and gas firms was met with outrage, with the trade body warning on Friday that tens of thousands of jobs could be lost amid the potential removal of capital allowances seen as critical to encouraging upstream investment.

Whether such a move would also trigger an outflow of investment in energy transition projects remains to be seen. But in any case, Denton’s Dubler said more innovation and private investment were now needed. Labour’s tighter fiscal rules would “lean heavily on private investment, and indeed an expectation business will play its part in wider society,” she added.

But Finance expert, Finn Wheatley, noted that areas like resilience, equity and conservation could be under-emphasized by private investors focused on optimal returns. “Strong policy guardrails will be needed to ensure decarbonization is achieved across all sectors in a fair and sustainable manner as funding sources shift,” he said.

It’s not about the amount of public spending commitment that gets things built, it’s faster planning, quicker decision-making, it’s investible policy mechanisms.
Sam Peacock, SSE managing director of corporate affairs, regulation and strategy

Sebastian Peck, Managing Partner at KOMPAS VC’s, believes Labour’s roll-back on its spending commitment would make it more difficult to attract the scale of private capital required. “If the UK government wants to meet its target of decarbonising its economy by 2050, it will have to develop a compelling strategy on how to manage the green transition and incentivise private investment in these areas.”

He said the huge injection of public capital through the IRA in the US had been very successful in stimulating private capital, and the UK needed to do the same “or it risks being left behind.”

Policies and planning

A number of people pointed to policy and planning as more important than spending commitments. “It’s not about the amount of public spending commitment that gets things built, it’s faster planning, quicker decision-making, its investible policy mechanisms,” Sam Peacock, SSE’s managing director of corporate affairs, regulation and strategy told the BBC.

SSE has pledged £40bn for low carbon energy by 2032. “The real issues are around converting this investment into deliverable energy generation projects through an arcane and underinvested planning regime,” he added.

Ms Dubler said with less public money to spend, business should now be looking to engage with Labour on reforming regulation and planning which can unlock investment. “Planning reform will still be huge: it’s considered the cornerstone of the growth mission. Understanding how to transform both brown and greenfield is not just a residential or construction issue; it’s a community building one, and that agenda is inclusive of all types of organisation,” said Dubler.

Indeed, reaching Labour’s zero carbon 2030 power target probably hinges on grid connections and CfD levels more than anything else, while planning and regulations also play a critical part in decarbonising buildings and transport. Against this backdrop, the shift to a more flexible public spending commitment seems a pragmatic move for the Labour Party to gain greater credibility in its approach to public finances.

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