A challenge faces the UK electricity industry, says Ian McCarlie
BLACK-OUT and white-out are both common enough terms, but less familiar to some may be the phrase brown-out, which has been used to describe a possible scenario this winter when National Grid may have to turn down its voltage to ration electricity supplies. This has come about due to the fact that a number of plants will be temporarily offline.
In those circumstances, we are assured, households and day-to-day business will not be adversely affected. There could however be some problems with electrical equipment such as clocks and television set-top boxes.
This situation yet again brings into sharp focus the challenge facing the UK electricity industry and policymakers and reinforces the need for a broad technology contribution to our generation mix, with renewables having its part to play. Figures recently released from DECC show that renewables contributed 16.8 per cent of UK generation capacity in Q2 2014 – clearly a significant contribution.
Renewable generating assets in the UK are generally viewed as sound investment propositions, particularly onshore wind. UK renewables continues to attract significant institutional capital, particularly pension funds and infrastructure funds which favour long-term investment with proven technology, coupled with long-term income and returns.
Whilst commentators regard the UK onshore wind industry as reasonably mature, there is readily available capital in the market, with assets increasingly being owned by pension funds and specialist infrastructure investors. This year we have already seen Hermes, Greencote Swiss Life, Pension Danmark and Chinese state investment funds acquire positions in UK wind portfolios. With this availability of capital, surely the UK is in a good place to further develop its renewables potential?
The electricity market reform (EMR) currently under way is a significant shake-up of the UK’s electricity industry. Its three key objectives of improving security of supply, stimulating the low carbon economy and reducing consumer costs are laudable cornerstones but the threat of “brown-out” must surely be a concern at a critical stage of EMR implementation. Just as capital is being deployed into the UK renewables market in large quantities, we are seeing increasing uncertainty that will impact on long-term investor appetite and possibly exacerbate energy security worries.
From an investor perspective, certainty and long term stability are key and while there is general support for renewables as part of wider energy policy, tinkering around the edges of support mechanisms produces spikes in deal making, driving owners, operators and investors to conclude transactions before the next regulatory deadline. One could argue that this is not the best use of capital and may impact on institutions looking to invest longer term as they may see investment opportunities as too short-termist, with unnecessary premiums to be paid to achieve market entry.
Offshore wind is seen by government as the key renewables technology for long-term scalable deployment, but this sector has had its confidence shaken by EMR budgetary pressure just at the time where significant capital is available in the market. It does feel as if we are moving ever faster to an energy cross-roads where there is the serious possibility that the international capital and expertise which government is trying to attract will look to other markets as they put the UK into the “too difficult” box.
Despite the conditions and factors mentioned, the UK remains a good market for renewables.
However, we can’t be complacent. If the investment conditions aren’t right, investors will not deploy their capital into new projects and new technologies, leaving the EMR architects with the real conundrum of “brown-outs” potentially becoming “black-outs”. The political ramifications of this can’t be understated.
The International Energy Agency’s executive director Maria van der Hoeven said: “… given their capital-intensive nature, renewables require a market context that assures a reasonable and predictable return for investors. This calls for a serious reflection on market design needed to achieve a more sustainable world energy mix.”
UK government should take heed as it seeks to find a solution to its energy challenges.
• Ian McCarlie is a partner in Pinsent Masons www.pinsentmasons.com