MPs and banks warn over costs of energy policy short termism


salamisliceEnergy infrastructure investors have warned government against politically motivated short-termism and to think carefully about making changes to renewables incentives. They also want longer-term clarity, and more warning before established policies are culled.

MPs on the Energy and Climate Change Committee echo their view, warning in a report that the UK will face higher costs to rebuild ageing power generation infrastructure if government chops and changes policy.

Act now or pay later

The Secretary of State’s policy ‘reset’ message, in which she stated that renewable power generators will be made to pay for their impact on the grid, was one area of concern highlighted to MPs during the inquiry into investor confidence last month.

The Department of Energy and Climate Change (Decc) must be “careful to make sure that any changes that do come through … are implemented carefully to ensure that existing renewable assets don’t experience something that current investors would regard as being retrospective”, Octopus Investments co-founder Chris Hulatt told the Energy and Climate Change Committee’s Investor Confidence inquiry.

Meanwhile, moves to close the Renewables Obligation (RO) to onshore wind earlier than planned have all but killed the market, according to one investor. Carol Gould, head of power and renewables, Bank of Tokyo-Mitsubishi, said conversations with developers regarding new projects had fallen way by 95%. She added that investors had “probably not” anticipated the early closure of RO.

Fear factor

Media coverage of subsidy cuts also spooked institutional investors, according to Peter Dickson, of Glennmont Partners. Prior to the policy ‘reset’ announcement, much of which was trailed in newspapers, conversations with investors had largely been concerned with procedural detail, such as how the RO worked and how certificates were traded, he told the Committee.

“In recent years the headlines—and I talk about headlines because it is a sentiment issue—started to express concern that the UK Government is no longer backing the long-term support, the reduction of subsidies. So the questioning has become very much more politically oriented around the longevity of support: do we see that there is going to be any changes? Will there be retroactive changes?” he said.

“There is a concern that investments that have been made would be retroactively impacted by changes that occur in the future, and we spend now a very considerable amount of time [with investors] around that.”

Dickson said that while UK governance had a track record that inspired a “much higher degree of confidence” than other countries, investors had not previously expressed such concern about potential policy u-turns.

“For the first time since we started raising funds quite some time ago, we started getting questions directly around that and on specific instances: if it has occurred, if it is likely to occur. What does it mean that we are seeing the changes? What do the individual announcements on individual policy measures actually mean on a larger scale? So that has become a considerably larger part of the discussions that we have with institutions.”

When the levy breaks

Chris Hulatt cited the removal of Levy Exemption Certificates with fewer than four weeks’ notice as an example of retrospective change – and that had negatively affected investors’ anticipated revenues.

Alejandro Ciruelos, project and acquisition finance – energy at Santander, agreed. He said that while the bank had anticipated that the LECs would be removed at some point, “the process itself was a bit sudden”.

Glennmont’s Peter Dickson said the lack of warning caused problems, creating a “disproportionate amount of attention on what occurred. I think had it been trialled for a period of time it would not have had nearly as much of an impact as it had when it disappeared so quickly”.

Drax and Infinis lost their bid to overturn the government’s decision to axe LECs in the High Court last month.

The two firms had challenged the decision, outlined in George Osborne’s July Budget, on the basis that only 24 days’ notice had been given. The Court acknowledged that the removal of LECs was sudden and unheralded. However, it concluded that the government had not provided any specific and clear assurances on the continuation of exemptions and accordingly ruled in its favour.

Mid-term outlook

The investors urged government to provide clarity on the future of the contracts for difference (CfD) regime and for some transparency on the workings of the Levy Control Framework (LCF). An indication of the government’s intentions for renewable energy targets post 2020 would also help investors make decisions, which usually worked within five to seven year cycles, they told MPs.

Failure to provide such clarity would lead to a higher cost of capital, which would ultimately feed back into wholesale power prices.

“The longer we delay investing in the longer term the costs of dealing with short-term problems will increase,” warned Donald McDonald, chair of the Institutional Investors Group on Climate Change. “It will shove up prices.”

 Storage and demand side response

Chris Hulatt said policy detail on creating energy storage and demand side response markets had been “conspicuous by its absence”, despite the sector being “ready for things to start happening”. National Grid’s enhanced frequency response tender – which will pay companies with battery assets to respond in under a second to grid frequency fluctuations – was a “good start”, said Hulatt. However, he called for policymakers and regulators to make rule changes that allow “storage to be co-located with generation like solar farms, for example, in a way that does not impact on the qualification of that renewable asset for the FIT or the ROC”.

There was “no doubt” that energy storage, and thereby demand response, were “going to make a difference to the world’s electricity framework”, said Hulatt. “It is a sector where there is a widespread level of interest around the world, and something that the UK should be exploring seriously.”

What government should do now

According to Matthew Knight, Siemens director of energy strategy and government affairs, Decc must stop trying to be all things to all people and get a balanced generation portfolio built. It should also publish a rolling annual view on the direction of travel, he suggested.

“Government needs to work closely with industry to build a long-term consensus view of which way we are going,” he told the Committee. “Decc scenarios, which have been published over the last few years, have tried to be all things to all people. For example, in offshore wind we had one scenario in 2014 that said we could build about 35 gigawatts by 2030. In another scenario, published on the same day, it said there might be 1 gigawatt in the whole of the 2020s. That is useless,” said Knight.

“We know 80% of what the electricity mix is likely and ought to be in 2020, and probably anybody from the nuclear industry to the solar industry could agree on 80% of that. However, it is characterised as an argument over the 100% when we could just get on,” Knight continued.

“We know we are going to need some CCGTs. We know we are going to need some offshore wind. I would love there to be some more onshore wind in Scotland. All of these things we could be getting on with while we finesse the future, and that is why a rolling forward view, published every year by Decc, endorsed by the Treasury and by the National Infrastructure Commission, and embraced by the whole industry, would say to us, ‘Broadly, that is the direction of travel.’ That would create more jobs in the supply chain than anything else. Nobody is after certainty, but just clarity of direction allows investment.”

See the Committee’s full Investor Confidence in the UK Energy Sector report here.

A version of this article was originally published in the Feb/March print issue of The Energyst.

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