Maintaining confidence in uncertain times
As the options for the UK’s enduring relationship with the European Union are considered there will be a period of policy uncertainty and investor caution. This applies to many industries, not just electricity generation.
However, while investment will continue to flow in the short-term as a result of committed projects, energy infrastructure has long-lead times and the industry needs to look forward and plan, with confidence, for major investment in the 2020s and beyond.
The scale of investment needed to meet our carbon target and replace retiring capacity barely needs repeating.
In the first half of this decade, the government and industry implemented the most comprehensive changes to the electricity market since privatisation. This package of measures – collectively known as Electricity Market Reform (EMR) – has helped to provide a stable platform for investment, and is now a fundamental part of commercial decision making. Like all frameworks it needs to evolve to keep pace with wider developments. However, fundamental changes are not required. The industry supports the EMR framework and invested £17.6 billion in 2015 alone.
While the industry has welcomed positive statements from ministers since the Referendum, the government must take the opportunity of the Autumn Statement to fully commit to the EMR framework. With the delay of publication for the Government’s Emissions Reduction Plan, the Autumn Statement can address existing policy uncertainty, allowing it to continue to invest in upgrading the UK’s electricity infrastructure. Specifically:
- The previous government set out a budget, spread over three auctions during this Parliament, for Contracts for Difference (CfDs). However, details of the first auction have yet to be released. We would ask the government to provide clarity on both the auction, and its views on subsequent auction rounds.
- The government has committed to running two Capacity Market auctions over the winter period. The industry has broadly supported the recent changes made to the Capacity Market, and the government’s desire to bring forward new gas-fired electricity generation to replace older stations which have, or will shortly, close. However, the key proposed changes – namely action on network charging and on diesel’s impact on air quality – have yet to be clarified. We would ask the government and Ofgem to provide this clarity as soon as possible, and to commit to the long-term future of the Capacity Market as the most cost effective means of ensuring security of supply.
- In this year’s Budget, the previous government extended the UK’s Carbon Price Floor (CPF) until April 2021. The CPF provides an important market-based signal to investors who have already made significant commercial decisions - including Capacity Market bids, plant closures, investment in new and existing plant and establishing long term hedging strategies - on the basis of the government’s timeline. While there is a live debate about what happens to the CPF after 2021 any change to the policy before then would have a number of negative impacts. We would ask the government to commit to the CPF until at least April 2021 – and preferably set out its’s longer term plans for the mechanism.
The industry believes EMR is the right mechanism to continue to encourage investment in electricity infrastructure. It has already invested billions of pounds under the framework. Government needs to send clear signals to the industry that the EMR framework will continue to provide the necessary confidence and continuity to obtain the billions of pounds more investment needed over the decades to come.