Budget 2014: Energy investment must prevail
In the upcoming Budget, the Chancellor must place investment in energy at the centre of his priorities if the UK's economic growth is to continue. Mark Stewart outlines the measures required to create confidence amongst investors and the areas where clarity is needed.
The CBI was absolutely right in its warning that the UK's long-term energy investment needs must be balanced against the costs borne by businesses and households. If the Chancellor has considered the following when developing his Budget, businesses could prosper and progress to a low-carbon economy.
The Carbon Price Floor
Businesses across the utilities and manufacturing sectors have been calling for the Chancellor to respond to the UK's Carbon Price Floor (CPF) due to the impact it is having on their energy investment needs. The CPF, which places a ratcheting minimum cost on carbon to try to reduce usage, has risen significantly in recent months, putting UK manufacturers at a disadvantage compared with their overseas rivals. We need to see this being levelled in a way that encourages low carbon transition without excluding industrial companies from competing in the wider market.
For investors to be prepared to commit the necessary sums of money for long periods of time, the Budget must build long-term confidence with investors that new power stations, especially low-carbon sources like nuclear power and renewables, will lead to acceptable levels of profit. In particular, the offshore wind industry requires clear support, especially in the subsidy regime where the price needs to be set at a realistic level to unlock investment and growth.
The Chancellor must also give a firm view which addresses the warning lights pointing to a large investment gap in green finance. With investments currently running at less than half of the £200 billion needed in energy infrastructure by 2020, the time for action is now. Strengthening of the Green Investment Bank is being called for along with a joined-up strategy, which is backed by funding and runs to 2030. In addition, the Government must vote for binding national renewables targets at EU Council.
Electricity Market Reform
Our energy infrastructure is aging and electricity demand is increasing - that's a fact. But in order for the UK electricity sector to meet its £110 billion capital investment need, for plant closures and replacing and upgrading the UK's electricity infrastructure, a few key measures must be addressed:
Further insight into the Renewables Obligation transition toward long-term contracts in the form of the Feed-in Tariff: Contract for Difference (FiT CfD). There is an expectation that they will provide clear and stable revenue streams attractive to investors - but is that actually happening?
Further insight into the rationale for the Carbon Price Floor. Currently, its aim is to encourage investment in low carbon generation by acting as a disincentive for electricity generators to use more polluting coal, gas and oil fired stations - but why is this not happening in practice?
A clearer timeline around the Emissions Performance Standard is to be set at an annual limit equivalent to 450g of carbon dioxide per kWh generated for new power stations. For this, the Chancellor needs to outline the timeline for Carbon Capture and Storage technology.
Further direction and clarity around a capacity mechanism for generators is needed. Two possible options have been suggested - a targeted mechanism focused on capacity which is used in extreme circumstances only, or a market-wide mechanism where all providers are given incentives to offer reliable capacity.
An update on the new institutional framework operating at arm's length from the government to administer, among other elements, FiT CfDs and the capacity based mechanism. Such new institutions will need to be accountable, independent, credit worthy, technically expert, commercially and financially skilled, and value for money.
The new framework would be designed to increase investor confidence in the operation of the market by ensuring that necessary resources are available, reducing any perceived interference of the government in how the market is operating from day to day (or year to year), while making clear that the government will continue to be responsible for setting policy.
In relation to market liquidity, the Chancellor needs to address the barriers to companies wanting to get involved in the electricity market in the UK and focuses on the low level of liquidity in the electricity wholesale market. The need for liquidity is of particular importance in the context of the FiT CfDs which depend, to a large extent, on there being enough competing companies for the market to work efficiently.
The challenge which underlies and complicates energy policy is the rarity of finding any single policy that delivers on all of these requirements at the same time. In addition, over time the relative importance of each requirement can change. But the future of power generation is absolutely critical and ultimately, if the UK is to remain a leading destination for investment in low-carbon electricity, the Chancellor must take action now.
Mark Stewart is head of energy at built asset consultancy EC Harris