This may be Camelot for green investors, but is it sustainable?

July 8, 2013

Last week saw an avalanche of energy news. Among the Green Deal statistics, Ofgem security of supply warnings and capacity market detail, there was a pile of new information about support for low carbon power. Many grumbles remain about the detail and complexity of the Energy Bill, but it is worth stepping back and asking the key question for investors in low carbon power generation; ‘Are you more or less likely to invest now than you were before?’

Of course, there are well-established reasons for caution. Concerns that George Osborne in particular, and the Conservative Party in general, are no longer serious about cutting carbon linger. These fears are often overblown, but they are certainly real.

Background noise aside, the degree of Government commitment to low carbon technology is staggering. The Treasury, often painted as the bogeymen of the green agenda, has agreed an extra £7.6 billion in 2020 to support low carbon technologies. Last week, draft strike prices were released that give guaranteed prices for renewables for 15 years. For offshore wind, this is three times the current wholesale price for electricity. The new nuclear power station in Somerset will now enjoy a construction guarantee of £10 billion backed by the public purse, on top of a decades-long, indexed-linked, guaranteed power price. If this is not Camelot for green investment in the UK, what exactly would it look like?

Perhaps a trickier question is whether such levels of support can last, and crucially whether they can be sustained beyond 2020 as the UK looks to complete the decarbonisation of its power sector?

Peter Atherton, a pugnacious equities analyst at Liberum Capital and formerly of Citigroup, has been touring Westminster and the City posing these questions. His analysis makes awkward reading:

  • Policymakers have “‘grossly underestimated the engineering, financial and economic challenges posed by the drive to decarbonise the electricity sector by 2030”.
  • Current policy will lead to sharply increased profits for utilities if they make the levels of investment required to meet a decarbonisation target. Atherton argues politicians will simply not accept this, under public pressure. But without those increased profit levels, the new power infrastructure will not get built.
  • He thinks a “crisis in energy policy looks increasingly likely”.

Using the Committee on Climate Change’s (CCC’s) nuclear scenario as his base case, Atherton argues it means the UK needs to build more than 110GW of new nuclear, renewable and gas power over the next 15 or so years (both to replace retiring plant and to decarbonise). This is compared to around 20GW of new capacity delivered by the dash for gas between 1990 and 2002. The entire capacity of the current system is around 80GW. The increased level of investment required to transform the energy system is colossal, as demonstrated by the chart below (the figures are for all energy infrastructure, including grid and smart meter investments).

Estimated energy infrastructure capital expenditure in the UK to meet 2030 decarbonisation targets (£bn)

Source: Liberum Capital

The chart shows a very sharp increase in investment in the next few years, mainly to meet the 2020 Renewable Energy Target. For comparison, the red lines show total investment in the Olympics, CrossRail and NASA’s budget (left to right). It is worth stressing that Atherton is not looking at these issues from a political or policy point of view. He is advising investors on where to put their money. His conclusion; be cautious about exposure to utility firms because even if they build this stuff, politicians may not allow them to make a fair return.

Of course, others strongly dispute Atherton’s analysis that the current plan’s “implausibility and contradictory nature” will soon be exposed. The CCC argue that decarbonisation of the power sector by 2030 is both “feasible and desirable”. DECC recognise that electricity prices will go up to pay for the new infrastructure, but argue that energy efficiency measures will more than offset the impact on household bills. It believes the new policy measures will attract money from the private markets – sovereign wealth and pension funds, even if utilities struggle to finance the projects. Others argue that the high levels of investment will bring jobs, export industries, or that gas and carbon prices will be so high that these numbers will look like a bargain anyway.

The political debate over energy in the next 10 years will be determined by which of these competing stories is accepted. The need for investment in low carbon is acute, but the levels of support must be realistic and politically sustainable. This may be a Camelot for green energy investment, but whether it will last, remains uncertain.

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