Veteran investor Neil Woodford has written a letter to the government to express his “frustration and disappointment” with chancellor George Osborne’s Budget after it caused a crash in one of his holdings in the energy sector.
Osborne’s ‘emergency’ Budget last week was broadly supported by the market, with the FTSE 100 posting a gain after the announcement despite the overhanging Greek debt crisis and the investor rout taking place in China. The index was up 0.91 per cent on the day.
Performance of index over 1 week
Source: FE Analytics
The energy sector was the target of some of the chancellor’s measures, with the tax breaks for North Sea oil and gas exploration being broadened and the idea of a sovereign wealth fund for communities living near shale gas being floated.
However, he also scrapped the exemption for renewable energy producers from the climate change levy – the tax designed to help cut carbon emissions.
The climate change levy was introduced in 2001 to help the UK reduce its carbon emissions, by applying a tax on energy delivered to non-domestic users to encourage greater energy efficiency. Until last week, renewables firms were exempt, as they were seen to be working towards the same goal.
The chancellor said: “Now we have a long-term framework for investment in renewable energy in place, we will remove the out-dated climate change levy exemption for renewable electricity that has seen taxpayer money benefitting electricity generation abroad.”
As would be expected, the move was immediately criticised by environmental campaigners. A Friends of the Earth campaigner said it was “like making apple juice pay an alcohol tax”, while Greenpeace’s director of policy said it showed Osborne is “a man out of step with the times”.
Woodford, who manages the £6.1bn CF Woodford Equity Income fund, has now lent his voice to those criticising the move.
The manager says there were “some bold, commendable initiatives” found in last week’s Budget that should help the government move closer to achieving its challenging aim of eliminating the deficit.
“There was, however, one element of the Budget which has caused us some frustration and disappointment – the decision to abolish the climate change levy exemption for renewable energy – and has compelled me to write a letter to the government to outline my concerns,” he said.
“The net result of government policy and numerous competition enquiries is a situation where there is nowhere near enough investment in new generation capacity. The UK has an energy system that is dangerously lopsided, because the renewable subsidy regime has favoured excessive investment in expensive, unreliable generation capacity and completely disincentivised further fossil fuel investment.”
“Abolishing the climate change levy exemption for renewable energy does not solve any of these problems. It does, however, carry some profound consequences for individual companies and, more importantly, for future investment behaviour.”
One consequence of the chancellor’s announcement was a 28 per cent plunge in the share price of Drax Group, which operates the Drax power station in North Yorkshire. This is the largest coal-fired power station in western Europe but is in the process of being converted to burn wood pellets.
Performance of stock vs index over 1 month
Source: FE Analytics
Woodford is a major shareholder in Drax Group, with the stock accounting for 1.27 per cent of CF Woodford Equity Income’s portfolio. This makes it his 22nd largest holding, out of 94 stocks.
“The Drax transformation has been a large, ambitious and pioneering project. As such, it has involved a great deal of risk. Nevertheless, we were supportive of management’s plans but recognised there would be a need for Government support for the project to ensure that risk capital would be rewarded with an appropriately attractive long-term return,” the manager continued.
“The project has been a rare British engineering success story. Drax has fulfilled its side of the bargain, managing the project to time and to budget, delivering a strategically important asset for the UK economy. The government has been delivered an enormous source of cheap renewable and dispatchable (i.e. where output is reliable and can be adjusted to meet demand – other sources of renewable energy, by the way, such as wind and solar, are not dispatchable) energy.”
“By contrast, the government has, in abolishing the climate change levy, gone back on its commitment. Not for the first time – Drax has taken the government to court in the past for trying to walk away from other forms of biomass subsidy commitment – it has pulled the rug from underneath the feet of Drax and its shareholders.”
Woodford (pictured) concedes that the scrapping of the exemption has been “immensely disappointing and frustrating” to Drax shareholders, but adds that the wider implications of the move are “even more disturbing”. 
He argues that this represents “latest example of back-pedalling” and demonstrates that the government is willing to amend policy to meet shifting political priorities, without giving due consideration to the implications it has for the economy or, in this case, private capital-funded infrastructure projects.
“I have to conclude that the government has either failed to understand the implications of this policy change or wilfully ignored the interests of capital providers in this vital industry. Long-term capital projects need consistency that extends way beyond the length of a political cycle,” he said.
“Government should be working in partnership with the private sector and the investment community, to deliver positive long-term outcomes for the UK economy and indeed the environment. Yet, in this particular instance, it is probable that Drax’s shareholders would have been better off if the company had simply continued to generate power by burning coal.”
“If government cannot be trusted not to fulfil its long-term commitments then it will have to accept that it cannot rely on support from institutional investors. That would not be a good outcome for the UK economy.”
