The government needs to provide the market confidence investors need to put money in to new infrastructure
The UK energy landscape is defined by a number of factors. First, with UK gas imports overtaking exports, the concern at being reliant on gas imported through pipelines controlled by people outside the UK. Next, with most of our nuclear power stations coming to the end of their useful lives, the fact that around 20% of the whole generation capacity will soon close.
Then there is the low carbon agenda, and the fact that some coal power stations will shortly close because they have opted not to invest in reducing emissions from burning coal which is required by the Large Combustion Plant Directive. It all adds up to a shortfall in generation capacity and the need for massive investment in new generation plant and in grid infrastructure.
The supply chain needs confidence to invest in manufacturing facilities, and enter into relationships to drive down cost
Government strategy in this area centres around promoting new nuclear and renewable power stations, and promoting liquid natural gas (LNG) import facilities, none of which rely on piped fuel. Implementation is by the Renewables Obligation (RO), Feed in Tariffs (FiT), Renewables Heat Incentive (RHI), and soon Contracts for Difference (CfDs). Each of these provide a stream of income to projects over and above the market price for electricity. The idea is that although this income will continue for the life of any particular asset, successive assets will attract lower levels of support as the technology improves and unit price falls. The other key strand of government strategy is that the required investment is financed by the private sector.
There has been progress on implementation this year with: the announcement of the strike price to support nuclear investment; the commissioning of London Array the (world’s largest offshore wind farm); solar generation and anaerobic digestion (AD) plant re-emerging; and clarification of the landscape for coal/biomass conversions. On the finance front the Green Investment Bank’s offering has been strengthened, and a further 18 projects have qualified (along with Drax’s coal/biomass conversion) for the government’s Infrastructure Guarantee scheme (projects include Eggborough power station’s coal to biomass conversion and two offshore wind farms).
Fundamentally, however, all investment is dependent on (a) return on investment (a key constituent of which is cost), and (b) on attracting finance. Both are dependent on confidence. The supply chain needs confidence to invest in manufacturing facilities, and enter into relationships to drive down cost, and investors need confidence that the completed plants’ projected income will continue so as to repay loans.
Again, fundamentally, if it is likely that the income to a project will fall because the government tinkers either with the regulatory support (e.g. RO, FiTs, DfDs etc), or by capping the price of electricity, then the supply chain will be less likely to invest in cost reduction, and investors are less likely to invest. It really isn’t rocket science.
Paul McQuillan is head of renewables sector at EC Harris