Investor confidence and the UK energy market

52519479 - saving to buy a house or home savings concept with grass growing in shape of house inside transparent piggy bankWhy has investor confidence in the UK energy sector dipped? Simon Hobday, partner at Osborne Clarke, suggests that inconsistency, lack of transparency and unpredictability in government policy remain key concerns.

What is causing this loss of confidence in the UK energy sector?

In a word, politics. The structure of the energy market in terms of support for low carbon generation, including renewables, has been under review in one form or another for the last 12 years. There have been large numbers of changes brought in under the electricity market reform (EMR) programme and new subsidy regimes under the Feed-in-Tarrif (FiT) programme as well as support for small modular reactors (SMRs), but these have been done without any clear direction or logical structure, leading to significant market uncertainty. Take, as an example, low carbon—this has been given a major focus, but questions remain as to how well considered this has been in the context of the overall system. The publication of the ‘Delivering UK Energy Investment: Low Carbon Energy’ report in March 2015 and prior to the EMR results being released, was certainly interesting in terms of its timing, and could be considered a response to the desire to put something in place.However, after the election last year, there was a significant change in emphasis of policy including a roll back of subsidy support. The manner in which this was done was piecemeal with no logical or consistent plan, giving the impression of being a knee-jerk reaction. And it is the way this was done, rather than what was actually done, that is contributing to the on-going problem and driving caution among investors, funders and developers. There are arguments on both sides as to whether supporting renewables is a good or bad thing, but on-going surprises and changes in subsidy levels without warning make it very difficult to take a view around what changes may or may not occur and the rate at which things might happen—this uncertainly does not give investors confidence.Prior to the establishment of the Department for Business, Energy and Industrial Strategy (BEIS), there was a relationship/policy overlap between the former Department of Energy and Climate Change (DECC), the Department for Environment Food & Rural Affairs (DEFRA) and the Treasury over carbon price support and the levy control framework. It remains to been seen how the new BEIS will fit into the new political landscape, but the relationship will be a key one as the UK grapples with the challenges facing the energy sector and the challenges of Brexit.

 

In what other ways have the recent policy changes around renewables affected confidence in the sector?

Government subsidy has encouraged a fall in prices across renewable technologies. It is appropriate for subsidies to be seen as a bridge to enable market costings, but there is a question as to whether overnight removal of subsidy—as effectively happened last year—is good for the industry. Similarly, the cuts to the solar subsidy were a little premature, and could have been introduced in a more timely and considered manner.

Such policy changes give rise to a mixture of unpredictability and the feeling among some investors that words are not matched by actions. This has again been seen in the level of consultation that is undertaken, and the way in which the government supports value for money energy prices for consumers while at the same time supporting high-cost forms of renewables.

Such inconsistency and unpredictability of policy is having a widespread impact on confidence in the sector.

With oil companies coming out in support of a reduction in reliance on fossil fuels, are we likely to see any change in government policy?

In order to predict changes to government policy, we need to understand the current policy and its overall objectives, goals and approach, and there is currently not that level of visibility.

Interestingly, this is the second year in a row that carbon dioxide emissions have stalled, despite economic growth. The global debate has moved from whether global warming is happening to how best to deal with it, and there is a significant challenge in moving to a post-fossil fuel world. The global Apollo programme to combat climate change is an interesting approach and certainly worth considering.

In terms of the government response and changes to policy, however, the government is not beholden to any sector of the industry–policies are driven by a range of issues.

What is needed in terms of investment?

Investors need clarity on policy and predictability. This does not mean no change—change always happens and if you have a feel for the change that is coming you can take a view on it. It is the ability to take a view due to the unpredictability of the change that is lacking at the moment.

Another factor to consider is the media interest in the energy sector. Energy companies have been publically battered by negative press. However, the level of knowledge about what is really going on in the industry is relatively low. Much of the public disquiet aimed at energy companies is in fact the result of policy decisions going back over ten years or longer, such as the wrapping up of social and environmental objectives in consumer bills, rather than paying for them by other sources. Increased clarity and a greater awareness of who is deciding what is needed in order to achieve a more realistic picture of the industry in the public eye.

In the same way, the press often portrays a distorted view of the energy market as a whole by focussing only on a narrow UK perspective—subsidy and approach to energy requirements varies between countries and so a global perspective is needed. Criticism that comes from the press without any sense of global awareness is not helping the industry.

In the long-term, industry will be innovating to deal with the challenges of today’s energy systems. Innovations (as with all investment) will need to be paid for if payment is not to come from a subsidy then private sector funding will be required. Inconsistency and lack of clarity will not help private sector funding solutions to develop.

How has the COP 21 affected the position?

Personally, I question the real difference that COP 21 will make. It is good from an aspirational and theoretical point of view in terms of providing an important framework, statement of intent and landmark agreement. However, because it is aspirational, legally it is not clear what difference it will make. On the one hand we have a commitment to achieving carbon goals, and on the other, there remain some real questions about how genuine that commitment is.

COP 21 is important from a global perspective, and the fact that it recognises global warming is certainly encouraging. However, it is the national government regulations and global and national entities that will have the greatest impact in nations around the globe, including the UK.

Simon is a partner at international legal practice Osborne Clarke, specialising in the commercial and regulatory energy sector. He advises energy companies, regulators, governments and commercial customers on regulatory issues and projects, with a key focus on smart grid, power management and decentralised energy projects.

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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Filed Under: Environment

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