Corporate

March 23, 2016

Bringing certainty in uncertain times for the UK’s energy sector

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by Rolf Merchant, Consultant

The trilemma facing the UK energy sector was writ large at the ‘A Crude Awakening’ event held by Instinctif Partners. Hosted at its offices in the City of London, the event featured a stellar line up of energy industry experts, who discussed and debated the challenges facing the sector, where opportunities lie, and how policy should be shaped to increase investor confidence.

Governments unclear on nuclear

The news is awash with the energy trilemma – the three intersecting problems the government faces: security of supply, affordability, and the need to move to a low-carbon future. But if it is one story that continues to dominate the headlines, it is the to-ing and fro-ing over Hinkley Point, and it featured heavily in the discussion.

The Rt Hon Charles Hendry, former energy minister, opened proceedings by suggesting that the resignation of EDF’s Chief Financial Officer, Thomas Piquemal, signalled the Hinkley Point deal is much more likely to go ahead. Mr Hendry commented that nuclear is an important part of the UK’s future mix, adding that the government was taking a “novel approach” by giving long term price-guarantees to secure investment.

A more pessimistic outlook on Hinkley Point, and the UK energy sector more broadly, was given by Sir John Baker, chairman of Bladon Jets, and former chief executive of National Power. Addressing the future of nuclear power he said “it is now moot whether go ahead with Hinkley B.” To Sir John, it was a prime example of policy vacillation of which governments past and present have been guilty. He argued that uncertainty has been increased by short-termist thinking and regulatory tinkering, resulting in fewer incentives to invest in power generation.

The management of nuclear waste was the main concern for Diego Biasi, Co-Founder & CEO of Quercus Investment Partners, a renewable energy infrastructure fund. “I have nothing against Hinkley Point,” he said, “but the very big issue with nuclear is how much it costs to dispose of and manage the waste at the end of operation.” Mr Biasi argued that focusing on renewable sources would be a far better course of action.

The renewable challenge

The UK’s mission to embrace low-carbon energy generation featured prominently in the discussion. Investment in the renewable energy market has increased substantially in the last decade, as Mr Biasi pointed out. In 2004, it stood at $45bn. By 2014, it had reached $270bn, and it is still growing. “Significantly, in 2015, renewable energy infrastructure accounted for 49% of all new infrastructure in the sector. So, it’s a market that is growing steadily,” Mr Biasi said.

Mr Hendry gave an optimistic assessment of the renewables sector. He praised the innovative work happening in British universities on energy storage in particular. Lawrence Slade, chief executive of Energy UK, agreed that energy storage has tremendous potential: “If it can be set up in the right way, if the regulatory regime around storage can be designed so it catches up to where the technology is, it can help us manage our future usage.”

Turning to government policy on renewables, Mr Hendry argued that the decision to cut subsidies for solar and onshore wind was correct. He pointed to Good Energy’s announcement that it would build the first subsidy-free wind farm in the UK as an example. “Subsidies should be there to facilitate the early growth stage of a technology, but it shouldn’t be a prop,” he said. “The cost of the energy shouldn’t go up to meet the cost of the subsidy.”

Sir John Baker agreed that excellent progress was being made in the renewables sector, but criticised successive government’s repeated policy changes that have derailed renewables projects. “We must have consistency and continuity to de-risk this market,” he concluded.

Making a home for energy efficiency

The panel debated how important energy efficiency initiatives are in helping manage demand in the long term.

“It’s an old saying, but it’s a true saying: the cheapest, most efficient energy is the energy we don’t use,” Mr Slade said. “We’ve been spending billions on energy efficiency and we’ve just scratched the surface with what could be done,” he continued. Referring to government policy he added, “if there’s an energy generation policy void post 2020, then there’s a significant policy void concerning energy efficiency.”

Sir John added that there is an enormous opportunity for the industrial sector to invest further in energy efficiency: “There are thousands of good commercial schemes for energy efficiency out there where the payback is nine months to a year. But there is some block in the boardroom and in chief executives’ minds that means they cannot see this wonderful fruit that’s hanging in front of their eyes.”

Looking at the domestic sphere, Mr Hendry said that the government may need to adopt a different policy approach to see the increases in efficiency needed. “Government can encourage change by relying on good will and hoping people will do the right thing, by incentivising people, or by compelling them. I think we now need to move to compulsion for energy efficiency.” Hendry argued that energy efficiency improvements on houses should be enforced as a condition of sale if the problem is to be solved.

Where next for policy?

The panellists agreed that the UK government’s had a significant role to play if investment is to increase in the UK energy sector.

“You can’t just let the market get on with it,” Mr Hendry said. “The government needs to get involved. It is simply too important an issue, and the government will be held to account.”

Slade stressed the need for certainty: “In an industry where you’re looking at projects that don’t just last a year but sometimes the build takes, three, four, five years, and where the return on the investment is actually measured in decades, you need that long term policy framework. That’s missing, and it’s been missing for some years now.”

Sir John agreed with this assessment. “We need more regulatory stability, more consistency and less tinkering with financial incentives,” he said. “So what to do? We need a much longer term strategy on decarbonisation with stable signals to the market. Government must set a framework that’s going to last longer than the life of an energy minister or a government, and find a way to get big projects through the planning system.”

The panel made optimistic noises – particularly on renewables, where the UK has the opportunity to be a world leader. In the shorter term, however, the panel felt nuclear has a vital role to play in securing the generation the UK requires.

The message from the panel, then, was that with a positive steer from government, the industry will have the confidence to invest, securing the UK’s energy needs and drive us towards a low-carbon future.

Our thanks go to Rt Hon Charles Hendry, Sir John Baker, Lawrence Slade and Diego Biasi for their thoughts and insights.

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