Investing in our future

Investing in our future

CategoryArticles Author Stephen Tromans KC Date

The Chief Secretary to the Treasury’s white paper proposals on infrastructure investment, presented to Parliament in late June, include a number of announcements on energy.  They did of course coincide with the announcement of Ofgem that the statistical probability of major power outages in the UK would increase dramatically with the closure of power plants up to 2015 – a point made more than once in this Blog.  This is perhaps the first official public acknowledgment of the mess we are in, and probably won’t be the last.  When there is talk of paying large consumers to reduce electricity use, and paying generators to revive mothballed or closed plant, we know things are serious.

So what did Danny and George have to offer?  Well, a lot of it is not exactly new, though equally it is not the “hilarious hyperbole” portrayed by the Labour spinners.  Much is regurgitation of the initiatives being proposed in the Energy Bill, already canvassed at length in the Blog.   The Government is however now announcing its draft strike prices for renewable technologies under the contracts for differences mechanism, though these will not be finalised until December, after consultation, and hence will not provide firm assurance for potential investors until then.  Broadly what is proposed is comparable to current support levels under the Renewables Obligation anyway.

Secondly, the BGS survey shows promising amounts of shale gas there for the fracking in the UK, but whether that Eastern Promise can be realised will depend on the package of Government action which will be published in July and whether it can indeed “kick start” the nascent industry.  Liberalisation of planning policy and procedures for environmental permitting are foreshadowed (with the possibility mooted of granting permits within 2 weeks by February next year!) but that will undoubtedly be highly controversial.  In any event, you can frack as much gas as you like, but it isn’t much use unless there is the generating capacity to burn it.

Thirdly, the Spending Round has extended the UK Guarantees Scheme introduced last year by a further two years to December 2016.  Hinkley Point C has been announced as being eligible for such a guarantee, which was represented by Energy Minister Michael Fallon as being a commercial loan and not a subsidy.  Eligibility is one thing: there is still a detailed qualification and due diligence process to be gone through.  What is notable is that the Spending Round announcement has not included a proposed strike price for nuclear generated power, an omission noted with regret by nuclear interests such as the Institution of Mechanical Engineers and the GMB Union.  “Intense and constructive” discussions continue, but no investor is going to proceed (UK Guarantees support notwithstanding) until they know the economics of the operation of the station.  Failure here plainly isn’t an option, though the timing is now such that nuclear energy can’t in the short term be relied on to keep adequate electricity flowing into the grid.  There is accordingly a heavy onus on bringing forward the (relatively) quicker and cheaper new gas plant, of which between 26 and 37 GW could be required by 2030, depending on whether national carbon budgets are adjusted.  However, as the white paper accepts, wholesale electricity prices are being suppressed by the low price of coal, which together with the unpredictability of wind power inputs to the grid, is making investment in new gas plant problematic.  The proposed solution is the capacity market mechanism, the first auction for which will be run in 2014, for delivery of capacity in the winter of 2018-2019.

All in all, a precarious situation, even if all goes to plan.  We must all hope for a series of mild and windy winters between now and 2020.

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