In his recent speech to the CBI annual conference, prime minister David Cameron rightly emphasised the role that infrastructure investment plays in driving economic growth and prosperity. The energy sector is a key part of delivering that much-needed investment. In our recent Powering the UK report, we set out how the sector continues to lead the charge within the UK in delivering new infrastructure as part of the process of transforming our energy system to deliver secure, low-carbon and affordable supplies of energy.
The signs of the impact this investment has had on energy producers and consumers are clear. For example, the doubling in the amount of electricity generated from renewable sources since 2009 has lowered carbon emissions and reduced the UK’s dependence on imported fossil fuels. And over ten million UK households have seen substantial reductions in energy consumption as a result of receiving insulation or other measures from their energy supplier.
In 2013 alone, the sector invested £13.1 billion in generation, transmission, distribution and supply, which represents around a quarter of all new infrastructure investment across the UK in that year. Unlike other parts of the UK economy such as transport and housing, all this investment is made by the private sector. This means that in 2013 the energy industry invested an amount equivalent to £500 for every household in the UK.
Through their investment and operations, energy firms have generated significant economic value for the UK. In 2013, energy firms contributed £25 billion in direct benefits to the UK economy, which in turn generated an additional £71 billion of economic benefit elsewhere in the economy. This means that the energy sector accounted for £96 billion in terms of gross value added in 2013, equivalent to around 6 per cent of total UK gross domestic product.
Furthermore, the energy sector supports around 680,000 jobs across the country, which means that one in every 44 jobs is supported by energy, and if generates billions of pounds in revenue for the Exchequer.
The scale of new energy investment we saw in 2013 is remarkable given that it is taking place against a challenging backdrop. One of the most prominent issues over the past year has been the affordability of energy and, in particular, the problem this creates for some businesses and households.
The challenges around affordability of energy in the longer term are expected to remain, given the pressing need for an even higher rate of new investment in many parts of the energy sector in order to meet growing capacity requirements, as well as the UK’s environmental obligations.
At the same time, the cost of this investment cannot be significantly reduced without undermining efforts to transform the energy system. This tension between the need for new investment and the continuing pressure from consumers for lower energy bills represents a challenge that will require continued concerted effort by government and energy firms.
We have seen this tension play out through a number of changes to climate and energy policies in the past year. For example, a reduction in the scale and ambition of the Energy Company Obligation and to the level and trajectory of the carbon price floor were both primarily driven by a concern about the burden and impact of policy-driven costs on energy consumers.
Affordability is one of the central pillars of energy policy, and it is an area that cannot be ignored if we are to successfully make the transition to a low-carbon future. However, it is important to recognise that the uncertainty around the future path of energy policy is challenging for those looking to invest in the UK energy sector.
While investment remains high compared to any point in recent history, the level is below what will be needed to meet our decarbonisation and renewable energy objectives. Indeed, it appears that the level of investment plateaued between 2012 and 2013. A survey of energy firms that EY undertook as part of the report points to a continued willingness to invest to meet these objectives but also to a concern about the future path of energy policy.
Many firms emphasised the need for a stable, transparent and predictable policy framework in encouraging new investment. Many respondents flagged policy risk and uncertainty in the regulatory environment as the main driver of investment decisions and around half of respondents suggested that an increase in the level of policy risk had led them to defer investments over the past year. This is particularly important because an increasing proportion of energy investment is set to be underpinned by specific policy-driven incentives.
August 2014 saw the Electricity Market Reforms reach the statute book. This has served to intensify the debate around energy policy and energy costs. As major investment decisions are awaited, and with the general election on the horizon in 2015, the question remains whether this and subsequent governments will hold their nerve and allow the markets to adjust, learn and deliver, or whether we will see post-implementation tinkering with the policy framework that could frustrate investors and asset owners alike.
Successfully decarbonising energy generation while ensuring secure and affordable supplies of energy involves a complex and interconnected set of issues that demands a commitment from across society. For many years, the energy sector has risen to this challenge through significant investment across the value chain. However, a contribution from government – to deliver a transparent and stable policy framework and by ensuring that the most vulnerable members of society are protected – is also vitally important. It is only through concerted action that we will meet the UK’s energy objectives to 2020 and beyond.
Tony Ward is EY’s Head of Power & Utilities for the UK & Ireland and Jamie Torrens, Assistant Director of Economic Advisory at EY