EY UK Energy blog

The Energy Bill is served: will the menu be tempting for low-carbon investors?

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Posted: Tuesday, 11 December 2012 at 5.00pm

The long-awaited Energy Bill has finally emerged after seven years in the kitchen and the head chef – Ed Davey – will be waiting anxiously to see if his menu appeals to potential diners. He’s got plenty of tables to fill: a £110bn capital requirement for investment in the UK’s energy infrastructure by 2020.

Davey will be all too aware that these diners have discerning taste and plenty of other restaurants looking to tempt them. He’ll also know they’ll have heard the clatter of knives and pans that’s been emerging from the kitchen over the past few weeks. Worried that nothing palatable could emerge from a fractious kitchen, the low-carbon diner will probably find the menu more impressive than expected. However, on closer inspection they’ll notice that many of the vital ingredients are still lacking and will be keenly waiting for them to be added as the Bill goes through Parliament.

The main course for these diners is the subsidy for low-carbon generation – to be delivered under the Contract for Difference (“CfD”) scheme. There appears to be good news in the budget available for the CfDs (tripling in real terms between now and 2020) and the announcement of a single CfD counterparty company. However, as expected, the Bill is mainly a list of instructions for preparing the secondary legislation so it’s difficult to derive much clarity over how this scheme will ultimately operate at this stage. As the details are established, investors will be looking for answers to some key questions, including:

  • Is this budget enough to cover renewables, carbon capture, nuclear and energy efficiency measures?
  • If electricity prices are lower than expected when CfDs are agreed the budget will be used up faster than expected. What happens if it runs out?
  • Will the CfD counterparty provide bankable certainty to investors?
  • We have some clarity up to 2020 but what happens after that?

One way for Ed Davey to build political support for providing investor-friendly solutions to these questions is to recognise the economic benefits that the sector can provide. These benefits are too often neglected when the case for policy support mechanisms is heard. Look at job creation for example; Powering the UK, a recent EY report showed that the energy sector has delivered 6% growth in direct employment between 2010 and 2011 with some regions experiencing a 45% increase in employment since 2008. Separately, the Government has estimated 22,800 jobs were created by the renewables sector from April 2011 to July 2012. The jobs are well distributed around the country and are associated with material capital inflows and boosts to GDP.

We need to keep the lights on and we need to keep energy affordable, but we also have an opportunity to set the foundations for an internationally competitive generation industry that can put the UK at the forefront of global developments in renewable and carbon capture technologies. Not only will this create jobs and export potential for the UK but it will also generate new sources of tax revenue that can offset the costs of policy support. We have an industry that has demonstrated a capacity to grow despite a lack of clarity and consistency in policy signals and the ongoing recession. However, in the past few months investment signals in the renewable energy industry have been heading in the wrong direction: we’ve just seen the UK slide down our ranking of renewable energy attractiveness, falling to sixth place behind France. The Energy Bill provides a platform for the Government to reverse this trend and help the industry grow. This will require a carefully calibrated policy mix that offers a credible and sustainable incentive for investment.

There are some signs that this could be happening, but ultimately, the proof will be in the pudding. When the Bill is finalised and the supporting regulations have taken shape it transpires that the commitments made are insufficient, ambiguous or watered down with get-out clauses, we could be served with a soufflé that collapses soon after it leaves the oven. Potential low-carbon investors will be waiting for more detail before they commit funds. We’ll probably see some credit cards emerge, but also a chef and his team working hard to explain the ingredients used in further detail and how they blend before we see anyone tapping in their PIN.

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