Business Confidence in the UK energy sector falls for second quarter in a row

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The UK energy sector experienced a notable decline in business confidence in the final quarter of 2024, reflecting both broader economic challenges and sector-specific issues.

The quarterly survey, by the Institute of Chartered Accountants in England and Wales (ICAEW), found that the Business Confidence Index for the Energy, Water and Mining sector declined for the second quarter in a row in Q4 2024  - from +4.4 in Q3 to +1.7.

The overall sentiment was influenced by several key factors:

1. Economic and policy uncertainty

The Autumn Budget announcements, particularly the increase in Employer National Insurance Contributions, have significantly impacted business sentiment. Many energy companies are grappling with the increased tax burden, which has led to concerns about profitability and future investment.

2. Investment hesitation

The energy sector, like many others, has seen a reduction in investment growth. Companies are cautious about committing to new projects amid the uncertain economic climate. This hesitation is partly due to the anticipated higher operational costs and the need to manage cash flow more conservatively.

3. Inflation and cost pressures

Inflation remains a persistent concern, with rising costs for raw materials and labour impacting the sector. Energy companies are finding it increasingly difficult to absorb these costs without passing them on to consumers, which could further dampen demand. The upsurge in National Insurance costs will only intensify these problems.

4. Sector-specific challenges

The energy sector is also dealing with unique challenges, such as the transition to renewable energy sources and the need to invest in new technologies. This links to the second point above, in that there is investment hesitation due to thoughts that the current energy policy direction might change. There is little enthusiasm to invest in new projects if the direction changes.

Confidence is low and these long-term strategic shifts require substantial capital, which is harder to secure in a low-confidence environment.

Overall, the energy sector in the UK is navigating a complex landscape marked by economic uncertainty, policy changes, and sector-specific pressures. While there are pockets of optimism, the general outlook remains cautious as companies adapt to the evolving economic conditions.