New research commissioned by the international law firm Freshfields Bruckhaus Deringer has revealed that a large number of top executives and main investors within the UK electricity industry believe that government’s proposed Electricity Market Reforms (EMR) will not help the UK meet its 2020 decarbonsiation target.
The results of the survey, titled Electricity Market Reform: Call For Clarity, show that 77% of those surveyed felt that EMR will not enable the 2020 decarbonisation targets to be met. In contrast, only 18% felt that it would.
A large majority of respondents (64%) also indicated that they think the UK will fall short of its 2020 private sector investment target of £110 billion. The majority felt that the target was ‘out of reach’, with a number questioning whether it would even be possible to spend that amount of money by then.
Of all sectors supported by EMR, offshore wind generation was seen to be the sector given the biggest boost by the outlined proposals. Nearly 80% of those surveyed saw the investment case for offshore wind boosted compared to 54% for gas-fired generation and 41% for nuclear.
Commenting on the findings, Alan Rae Smith, Head of Energy Projects at Freshfields said: “This is a once in a generation chance to reform a market that literally feeds the UK economy, yet analysts seem to be struggling to make the EMR investment case understandable, let alone attractive to their clients.
“Power companies face a double bind: they are expected to lead the reforms and draw investment towards low-carbon technology, but simultaneously keep electricity prices in check and supply secured. This makes high-risk and costly investment decisions unappealing. The markets see the targets, both financial and time related as too ambitious, and investors are simply unsure as to what will happen to their money.
Rae Smith added: “Unless clear incentives for renewables are introduced in the UK together with consistent policy, long-term commitments and the prospect of cross-party agreement, investments are likely to flow to other countries.”
A significant minority of those polled (26%) viewed government’s EMR proposals negatively, with the majority (72%) expressing neutral-to-positive viewpoints to EMR. However, despite all respondents being heavily involved in reforming the UK’s ageing electricity infrastructure, only one in ten claimed to have detailed knowledge of the proposals.
Rae Smith believes that government’s announcement of various details surrounding the Energy Bill last week, including news that the Treasury has set aside £7.6 billion for low carbon investment up to 2020, raised more questions than it answered.
He explained: “Being given more detail is clearly a step in the right direction, but the industry still sees too many unanswered questions and is raising many more. For example, what financial backing will the government-owned Contracts for Difference (CfD) counterparty receive? If none, how will generators get satisfied with the CfD counterparty credit risk? How will the government-owned counterparty CfD levies be calculated and funded and who will take the decision on the decarbonisation target, which has been pushed down to secondary legislation and out to the next Parliament in 2016?
“The answers may, or may not come in the revised draft of the Energy Bill, the publication of which is expected imminently. The market is holding its breath until it sees what comes next. The sector simply cannot square the competing objectives of secured supply, low energy bills and low carbon – so-called three-dimensional chess – and does not believe the 2020 goals, nor the timeline, are realistic. 2020 investment decisions, given the time taken to achieve planning approvals and then to construct assets, have on the whole already been made and what’s already in the pipeline is going to fall way short of the targets.”
Rae Smith concluded: “Given the extended timescales involved, intra-governmental and cross-party agreement and collaboration are essential. Further, incentives should be understandable and long-lived – and built to neatly dovetail with international carbon markets, the EU framework and global climate agreements. Without them entrepreneurial players will be squeezed out and low-carbon investors scared off – damaging the long-term health of the industry, and undermining the 2020 and the 2050 goals.”
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