After Brexit...How will investment in electricity change?
Clarity and stability are needed to encourage investment in energy generation and infrastructure in the wake of the vote to leave the EU, says Jamie Grant.
For many in the investment community, 24 June threw up something of a surprise, with few anticipating that the UK would vote to leave the EU.
Given that investment in new electricity generation in the UK has come from diverse international sources in recent years, one of the potential impacts is a change in this underlying investment market.
As Michael Kelly argues in this article, UK energy infrastructure continues to limp along looking like a threadbare, post-war heirloom. The Government has managed to encourage investment into the grid through regulated returns, which has largely been underpinned by balance sheet financing.
Even with current levels of investment, these assets are increasingly at the end of their service life and continued investment is still required. However, we have seen a sea change in generation, with the closure of centralised fossil fuelled plants and a move to distributed generation supported by more speculative sources of capital. The mass of these new megawatts have been provided by renewable generation, although this has been supported by peaking power plants and the limited deployment of plant such as combined-cycle gas turbines (CCGT). Attractive and, critically, stable returns provided by such mechanisms as the Renewables Obligation (RO) have helped encourage investment to transform this market.
But the generation development industry finds itself hit by a triple whammy:
- The low oil price continues artificially to suppress energy prices (and its true effect on the market is limited as we decarbonise our sources of generation)
- The RO has now essentially ended and there appears almost zero confidence in the market that a sufficient mass of replacement contracts for difference (CFD) projects will be supported, or that an alternate mechanism for plant such as CCGT will come to fruition
- Post-Brexit, the market needs to demonstrate that it can still offer the stable environment for the deployment of capital that has made it so attractive in recent years
A solitary focus was placed on Hinkley C by the previous Government, in part as a means of justifying the lack of continued support for diverse and distributed sources of generation. There is obvious solace in the commitment that the Chinese and French investors have made to the project in the aftermath of the referendum, and this has now been formalised by the government committing to the project, albeit not without a moment of hesitation.
Despite this, it is timely that the Government realises that the future energy mix cannot be underpinned by one technology in one location.
The opportunity for continued investment in the generation sector, with all the economic benefit it will bring to private sector business, should be seized by the government and a clear and stable support framework (which does not necessarily mean generous) should be put in place. This would be a certain means of conveying the message that the UK remains open for business and helping to cement our ties to outside capital markets at this time of flux.
It is vital that the lights stay on, but they need to stay on the right price and this only seems viable is we maintain a good relationship with international capital markets.
Jamie is a Senior Planner working on a wide range of commercial, rural and renewables planning projects for our clients across Scotland. With a background as a chartered town planner, Jamie has previously worked for BayWa r.e., Inﬁnis and Terence O’Rourke Ltd.