Unpredictable policy deterring investment in energy

Energy UK says certainty is needed to decarbonise the energy sector at the lowest cost to consumers

A lack of clear, stable and predict­able policy is deterring investment in Britain’s energy sector, Energy UK has warned.

In a new report, the trade body outlines a number of key concerns which it says will need to be resolved in order to decarbonise the energy sector at the lowest cost to consumers.

The report’s findings are based on 27 interviews and a roundtable discussion, which Energy UK held with industry companies and investors to gauge their views about current energy policy.

One of the main problems highlighted by participants was the lack of visibility over the support for low-carbon generation beyond the end of the current decade. This is due to the expiration of the levy control framework in 2020/21, an unknown trajectory for the carbon price support and the absence of a timetable for future contracts for difference (CfD) auctions.

“Power projects take a significant number of years to go from planning to [final investment decision], and developers are making decisions now with little assurance around the power policy post 2020/21,” the report states.

It continues: “The result of this is likely to be a less competitive development pipeline post-2020, supported by a supply chain that, due to poor policy visibility beyond 2020, has not been able to make optimal financial commitments.”

Energy UK says investor confidence was severely damaged by a series of sudden policy changes, including the last-minute cancellation of a £1 billion carbon capture and storage competition, the early closure of the renewables obligation and a drastic reduction to feed-in-tariff rates. The decision to exclude mature technologies such as onshore wind and solar from CfD auctions similarly dampened confidence.  

“The lack of transparency in decision making and limited engagement with investors removed some level of trust towards energy policy,” the report argues.  

It says predictable policy has become increasingly important due to extensive government intervention in the energy market. Developers can no longer raise capital purely on the basis of potential revenues from the wholesale and ancillary services markets, and now need some form of guaranteed revenue stream such as a CfD or capacity market agreement.

The report also identifies specific fears over political pressure on the retail market: “The level of capital mobility in the international finance market means that overseas investors view the UK energy market as a much less attractive place for investment when the political messaging is negative.”

Recommendations

To address the concerns, Energy UK says clarity over the replacement for the levy control framework is needed “urgently” along with a commitment towards future CfD auctions.

It urges the government to consider wider industry implications when making significant policy decisions - placing a greater focus on the impacts on investor confidence - and avoid any retrospective changes.  

The government should also deliver an annual policy statement, setting out forthcoming energy policy and the costs and benefits to domestic and non-domestic consumers. The report says this would help to “rebuild the trust between government, industry and customers and set out a clear vision for investors who will be vital in delivering an energy system fit for the future".

Energy UK chief executive Lawrence Slade commented: “The government has a vital role in creating the right environment for attracting investment - which is critical at a time when we need to invest £180 billion by 2030 to transition to a low carbon economy."

He said the success of the recent CfD auction showed how the industry could deliver results when given the right framework.

“We should be building on this, but instead there is little clarity about energy policy beyond 2020, leaving investors without the trust and certainty required for long-term investment and risking future projects,” he added.
 
“The message from investors and the energy industry is clear – if the government provides certainty and stability, we can deliver the investment required. Without it, the future will come with a higher price tag for all of us.”

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