Labour leader’s promise to freeze cost has arguably increased the risks for investors wanting to fund low carbon generation
The last few weeks have seen the cost of electricity, and more broadly energy, become a political issue. A reason to avoid writing this piece but here goes.
The UK has ambitious plans to substantially decarbonise the electricity grid by 2030, albeit this has yet to be set down in law. In order to achieve this it will require a considerable amount of investment, £100bn in generation capacity by 2020, followed by a further £90bn by 2030.
Add to that the prerequisite for a smart grid to manage the intermittent nature of much of the renewable capacity and we are looking at a further £12bn by 2020, not to mention the Energy Company Obligation to invest in demand reduction of £1.3bn per year.
Perhaps we have got used to large numbers, but a capital programme in excess of £200bn is big. So what? I hear you say, the energy companies can afford it. Alas, according to the Committee on Climate Change’s May report on Energy Market Reform there is a real risk that they can’t, and that the UK will need to seek investment from the broader international community.
These investors will want to minimise risk and get a reasonable rate of return in line with that risk: the higher the risk the higher the return required. Miliband’s popular price freeze pledge has probably increased the perceived risk. The danger is that the cost of getting investment into our green infrastructure has moved up a notch or two, or worse, could be heading elsewhere in the world. Green investment in the UK electricity sector is a long term issue where the benefits can outweigh their cost, both in terms of environment and employment, but ultimately the UK will have to pay, whether that be through taxation or through our bills.
It is an area where politicians quite rightly have a role to play and should engage with the issue. But it is also one where they need to tread carefully and behave in the best interests of their country.
Nick Cullen is a partner at Hoare Lea