Despite facing a global downturn, a financial sector crisis and a double dip recession, the government has not flinched from climate commitments enshrined in the Climate Change Act of 2008, and mapped out in the UK Low Carbon Transition Plan of July 2009.
PwC’s Low Carbon Economy Index shows that in 2011 the UK reduced carbon dioxide emissions intensity by 7 per cent. But behind the numbers, with GDP growth of only 0.7 per cent, we can see that it is the right kind of results for the wrong reasons. Much of the reduction was due to mild weather and lower output. The downturn has proved to be an effective greenhouse gas mitigation strategy.
The downturn has also had a notable impact on government policies for energy, and has provided no respite from the financing challenge. In fact, in the five years since the credit crunch officially started, the availability of finance has been a headache for the utility industry’s low-carbon transition. Pension and insurance investment is more involved than five years ago, with Allianz, Munich Re and the Danish Pension Fund among high profile investors in European power and renewable assets, particularly onshore wind where returns are relatively steady and reasonably predictable. But this is still a tap that is not fully turned on.
Going forward, the government is relying on Electricity Market Reform to deliver the £110 billion investment required in UK energy. Yet market participants face uncertainties and upheaval for the remainder of the decade, as recent PwC analysis of the power capacity market highlights.
Peak capacity margins have been increasing in the past few years on the back of lower demand and now stand at around 25 per cent. But in a scenario with no new gas plant commissioned and the planned early closure of both coal and gas-fired capacity, the estimated peak capacity margin could fall to 6 per cent by 2015. The latest proposals from the Department of Energy and Climate Change on the capacity market could deliver increased capacity as early as 2015/16 but in reality it needs to happen quicker than that, plus uncertainty is delaying investment (see feature page 20).
Looking at offshore wind as an illustration, the perception of risk by investors has improved, but this improved confidence needs to translate into an increase in both new equity and debt capital investment and lending to offshore wind developers, if much of the pipeline of development projects in that sector is to reach commercial operation.
Throughout the economic downturn, the European Union Emissions Trading Scheme has remained a central plank of EU climate policy. Traders, though, must look back nostalgically on 2007 when carbon traded at around €20 (£16), almost three times today’s prices. As the recession has bitten, emissions have fallen, driving down the value of carbon and making low-carbon investment harder to finance.
On the flip side, there has been a lower burden of carbon regulation on business during difficult times. But the scale and duration of the downturn is storing up problems for the EU ETS, with a big overhang of surplus allowances. A political fix is needed to get some tension back into the market.
In many respects, the low-carbon transition met political and economic reality in Copenhagen in 2009. In the early days of the credit crunch, many political and business leaders drew parallels between the climate crisis and the financial crisis, to support the case for swift and radical action on climate change. Five years on, the critical differences between these threats are clearer. The financial crisis hit hard and fast, its effects painfully visible in recent years, while for most of us, at least, the really serious and sustained impacts of climate change will only emerge over decades. But that does not mean the problem is any less pressing.
Ronan O’Regan and Jonathan Grant are directors at PwC
This article first appeared in Utility Week’s print edition of 26th October 2012.
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