Finance in an uncertain world
A changing generation fleet coupled with likely increased demand through electrification of transport and heating means that significant investment in the energy sector is needed going forward. The UK Government expects that over £140bn needs to be invested in new generation capacity by 2030 and a further £40bn on enhancing the network; other sources have put these figures even higher.
Investor confidence has been shaken in recent times due to a combination of uncertain government policy and indecision. Upon coming to power, government sought to control low carbon policy costs under the Levy Control Framework which removed the route to market for maturing technologies such as onshore wind and solar. Subsequently, government has shown a commitment to invest and support selected projects, for instance agreeing after some delay Hinkley Point C nuclear plant and announcing £760 million for future CfD rounds for offshore wind. Views are that new technologies, such as storage, are receiving seed investment but will take some time to attract the long term low risk finance required so long as revenue streams remain uncertain.
To further complicate the investment picture, Brexit has muddied the water as investors wait to see what the UK’s future trading relationship will be. Brexit so far has not had a negative impact on foreign investor appetite for UK energy assets – partly because it has only been four months and article 50 has not been triggered yet, and the declining exchange rate that benefits foreign investment. Nevertheless, it brings a level of uncertainty that may have longer-term impact on the UK’s economic growth, which in turn can reduce demand for energy or returns on investment into energy assets.
In general, a lack of transparency and forward planning continue to plague investors. Whilst there is a debate about whether the Levy Control Framework budget needs to be set beyond 2020/21 to provide investors with some predictability, what is certainly required is some indication of the funding available and the route to market for emerging and mature technologies, this also includes a decision on the long term future of carbon pricing in the UK.
In the short term, there are reports that investors are more likely to invest on an ethical basis as returns are less certain with a new emphasis on developing projects which don’t rely heavily on subsidy given the current uncertainty.