Powering the UK 2013

Investing in future growth

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Investment to secure the UK’s energy supplies

In 2012, private sector investment in energy rose to £11.6bn, representing around 10% of UK capital investment in 2012, or equivalent to building 20 Olympic stadiums. This was more than private sector investment in transport or public investment in health or education.

Renewable energy is an important component of this. Between January 2010 and April 2013, £29bn in renewable investments was announced, expected to support 30,000 jobs.12

Energy companies have proposed investing in enough additional Combined Cycle Gas Turbine plants and nuclear power stations to power 25–30mn homes (27 GW)13 over the next decade, but many projects are awaiting Government decisions before starting construction.

According to the September 2013 Ofgem Supply Market Indicators, although electricity and gas prices have increased by 5% and 7% respectively over the last two years, the increase is, in part, funding renewables, and the replacement of ageing network infrastructure and thermal power plants to meet decarbonisation and renewable targets.

Continuing investment to secure the UK’s energy supplies

The energy sector faces significant challenges over the next decade as it tries to stay affordable whilst providing secure supplies and meeting renewable energy and decarbonisation targets.

The rate of investment among private companies in the sector averaged £8bn p.a. over 2007–11, reaching c£11.6bn in 2012.14 Examples of major projects completed or investment decisions made in 2012 include:

  • Completion of Phase I of the London Array project, currently the world’s largest offshore wind farm, which officially opened in June 2013. The project has an installed capacity so far of 630MW, and, when complete, will power up to 700,000 homes.
  • Completion of the East-West Interconnector in October 2012, a 500MW sub-sea electricity cable linking Wales with the Republic of Ireland. Costing€500m, it is the first direct connection with the Republic of Ireland’s electricity system.
  • Network companies15 have agreed binding plans with Ofgem, the energy regulator, to invest up to £31.8bn over the next eight years to maintain, upgrade and build new transmission and distribution networks across the country. Key projects include a new sub-sea electricity cable linking England and Wales with Scotland.

These projects and others represent a level of investment equivalent to building 20 Olympic stadiums or c10% of all capital invested in the UK economy in 2012.

As Chart 6 highlights, private companies in the energy sector committed more to the UK economy than other major sectors such as transport, construction or financial services.


Chart 6: Public and Private Capital investment in 2012 across major economic sectors

EY - Public and Private Capital investment in 2012 across major economic sectors

Source: ONS Business Statistics, Ofwat, HMT Treasury Capital Expenditure accrued to calendar year 2012


Renewable energy now accounts for around a third of energy sector investment, with the remainder split roughly evenly between networks and CCGT investment.

As Chart 7 shows, much of last year’s investment was in renewable generation. The share of capital invested in networks has also increased as networks businesses replace ageing infrastructure and build new cables linking offshore or remote renewable generation to major towns and cities. Network investment rose to c£2.8bn16 in the 2013 financial year, a 34% increase on 2012.


Chart 7: Composition of investment in the energy sector investment in 2012

EY - Composition of investment in the energy sector investment in 2012

Sources: National Grid, DECC, Developers


Investment in renewables and energy networks

Renewable generation

Between 2007 and 2013, the share of renewable energy within total energy sector capacity investment grew to 28%. Between the Q1 2010 and Q1 2013, total installed renewable capacity increased from 9.6 to 17.5 GW – equivalent to adding the capacity of up to three or four large power stations, or enough power to supply 8m homes.

The growth in renewable electricity capacity has varied by technology. Wind accounts for around 55%, with the rest split roughly evenly between solar, biomass energy from waste and water (hydro, tidal and wave). Of these, solar is the fastest growing: its capacity has grown 50 times since 2010.

Between January 2010 and April 2013, £29bn of investment in renewable energy was announced, with the potential to support up to 30,000 jobs.17


Chart 8: UK renewable investment and jobs from January 2010 to April 2013, by region

EY - UK renewable investment and jobs from January 2010 to April 2013, by region

Source: DECC Renewable electricity capacity and generation 2013


Networks

A significant level of investment in the energy network is required across the country to replace and maintain existing ageing and obsolescent infrastructure, to improve energy security (through more interconnection) and to support the increased levels of projected renewable energy deployment. Network investment rose to over £2.8bn 18 in the 2013 financial year, an increase of 34% from 2012. Part of this is needed to provide new grid connections for locations, often remote, which produce much of the UK’s renewable power.

Investment is also needed to increase the existing long distance transmission grid’s capacity to transport power to often distant population centres. Similar upgrades will be required for all types of power plant as the system develops. Transmission and distribution costs are regulated and ‘passed through’ to consumers on their bills.

 

Investments in conventional energy sources

Gas generation

Investment in conventional energy has slowed compared to renewables. The number of proposed Combined Cycle Gas Turbine (CCGT) and nuclear power plants in the pipeline is substantial19, but only 4% are under construction. As part of the Electricity Market Reform package (discussed below) the Government has proposed a ‘Capacity Market’ payment mechanism for existing and new power stations to ensure sufficient investment in reliable capacity.

If 26GW of additional gas generation capacity were built, as DECC estimates is needed20, a substantial number of new jobs could be created, particularly during construction, with additional indirect jobs in the construction supply chain. Our high level estimates suggest up to 60,000 jobs could be created during construction, with around 4,500 of these permanent. The construction of many CCGT plants could be started within 1 to 2 years, boosting civil engineering and construction industries, and the wider UK economy.

Nuclear generation

The UK currently has 16 nuclear reactors generating 10 GW – up to a sixth of the UK’s electricity. However most of the reactors are expected to be retired by 2023. To fill the gap, EDF Energy has proposed building two nuclear reactors at Hinkley Point, Somerset, and an additional two at Sizewell, Suffolk.

Should these, and other proposed projects be developed, they would replace over half the UK’s current nuclear capacity.

A nuclear renaissance? New nuclear generation and its economic impact

EDF Energy is progressing with its plans to develop Hinkley Point C, the UK’s first new nuclear power station for a generation. EDF and the UK Government signed a commercial agreement in October 2013 on the key terms of a proposed investment contract for the Hinkley Point C nuclear power station setting out a strike price for the electricity generated from the plant. A final investment decision requires agreement of the full investment contract, finalising agreements with industrial partners for equity funding, and a decision from the European Commission on state aid.

Construction of Hinkley Point C will represent an investment in UK infrastructure similar in scale to the construction undertaken to support the London 2012 Olympic Games. The project will generate around 25,000 jobs during construction and 900 permanent ones once the new power station goes into operation.

Once built, the company estimates that Hinkley Point C will add £144m each year to the UK’s GDP, including £100m each year in the regional economy during the peak construction phase and then £40m annually during the 60 years that the plant will be operational.

Recently released figures from EDF Energy report that it has agreed new contracts with over 300 UK companies supporting its plans for new, low carbon, nuclear worth in excess of £650m. A new build programme would therefore be a major boost for the UK economy.

Source: EDF Energy

Overall, there are substantial proposed conventional projects in the pipeline to ensure continued diversity of energy sources in the UK, with the potential in the next decade to create more jobs and value added to the UK economy.

 

The impact of policy

Electricity Market Reform

National Grid and Ofgem have recently warned of increased risk of potential power shortages, particularly in 2015/16. To comply with the EU Large Combustion Plan Directive, a significant number of coal and oil-fired power plants are due to close by the end of 2015. In the midst of this tightening in supply, investors in conventional power have held back until policy framework is more certain.

The Electricity Market Reform is the Government’s flagship policy to ensure continued and long term investment in the sector. It consists of four main policies:

  • a Contract for Difference feed-in tariff to support low carbon generation
  • a Capacity Market to ensure adequate capacity
  • a Carbon Price Support which ensures a minimum, stable price for carbon
  • the Emissions Performance Standard – a backstop to ensure future investments are in line with government decarbonisation plans.

In July 2013, DECC announced draft strike prices for renewable investors. These are broadly based on payments currently received under the Renewable Obligations Scheme but with a discount, as it is seen as more secure.

EMR does signal a long term commitment by the government to supporting the transition to a low carbon energy system while securing supply. However, the jury is still out on its likely impact on investment and a stronger commitment beyond 2020 may be necessary to secure the longer term benefits of the transition to a low carbon energy system.

Scottish independence referendum

On 18 September 2014 Scotland will hold a referendum on whether to become an independent country. Scotland is an important destination for UK renewable investments, as highlighted in Chart 8, and the referendum decision will potentially have a significant impact on overall UK energy investment.

Impact of European policies in the UK

The East West Interconnector, a 500MW sub-sea cable connecting Ireland and Wales that provides additional interconnection between the UK and its neighbours, became operational in October 2012. Similarly, the impact of the Third Energy Package, transposed into UK law in March 2011, is increasingly shaping electricity and gas market arrangements.

The Third Package is a major legislative package to create an internal gas and electricity market in the EU. It sets the legal basis for enactment of a set of rules (network codes) governing gas and electricity markets across the EU, and is expected to shape Great Britain’s market in the near term.

Network codes are binding common rules governing the single market, intended to remove obstacles to cross-border trading. However they are also beginning to change how electricity and gas markets operate within Great Britain.


12 Dates: https://www.gov.uk/government/news/davey-announces-29-billion-boost-to-economy-and-makes-the-case-for-scotland-to-remain-inthe- united-kingdom

13 Source Platts UK Power Tracker 2013: comprises 22GW CCGT and 5 GW Nuclear which are Proposed, Approved, Under Construction or Suspended

14 Sources: ONS Electricity Gas and Water Investment, Ofwat Water Sector Investment

15 Including gas and electricity transmission and distribution companies.

16 Regulatory accounts for the four electricity and gas transmission licensees

17 Source: https://www.gov.uk/government/news/davey-announces-29-billion-boost-to-economy-and-makes-the-case-for-scotland-to-remain-in-theunited- kingdom

18 Regulatory accounts for the four electricity and gas transmission licensees

19 The Government estimates that 26GW of gas generating capacity will be required to secure electricity supplies.

20 DECC, Gas Generation Strategy, December 2012, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65654/7165- gas-generation-strategy.pdf