Five ways to improve investor confidence in Britain’s energy sector

In recent months, prominent investors have been telling MPs on the Energy and Climate Change Committee (ECCC) what could be done to make them feel more comfortable about ploughing money into Britain’s energy sector.

Utility Week has put together a list of the top five things policy makers should do to win the confidence of investors, based on what they said. 

1. No more surprises! – The government’s last minute decision in November to cancel the £1 billion competition to develop carbon capture and storage (CCS) provides the perfect example of what not to do. E3G programme leader Chris Littlecott described what happened as “shabby”, telling the committee: “It reflects very badly on the UK government’s relationship with business and their ability to drive long-term investment.”

Director of business and investment at Tees Valley Unlimited Neil Kenly only found out about the decision on the day of the public announcement: “within hours the phone started ringing from the private sector companies that we have on board, trying to understand what the implications were, going forward.”

The only hint of what was about to happen came in a newspaper article the day before, said Capture Power financing director Richard Simon-Lewis: “That is the first time that we got a sense that something was coming down the track  ….It is fair to say it was very unexpected from our standpoint.”

Chief executive of the Carbon Capture and Storage Association (CCSA) Luke Warren said things haven’t improved since: “There has pretty much been radio silence from Decc and from the government in general about the next steps.”

2. Make fewer policy changes, none of them retroactive – Investors told the committee the sheer volume of policy changes was making projects more risky. Octopus Investments’ chief financial officer and co-founder Chris Hullat said changes could undermine confidence “even if relatively minor or confined to a particular area”.

Chief executive and managing director of Velocita Energy Developments Andree Lee said investors were already pricing the risk into their decisions: “When you look at an investment situation for the UK, you will only do it at a much higher cost than you would, say, in France or Germany, because the energy markets and the tariff structures are so much simpler with much less opportunity for chopping bits off or loading in extra costs.”

Policy changes which were seen as being retroactive were particularly damaging to confidence, investors explained to MPs. Chief executive of the Solar Trade Association Paul Barwell highlighted the ending of levy exemption certificates for renewables in August as an example: “If you remove that levy exemption certificate that has basically increased the cost of all those projects by nearly £5 a megawatt hour. It happens to all existing projects as well.”

Hullat said it didn’t matter whether or not the government saw a particular change as being retroactive as it was “in the eye of the lender or equity investor as to how changes impact overall sentiment”.

3. Plot the way forward – Again and again, throughout the meetings, investors repeatedly called on the government to provide the industry with a long term game plan, laying out the broad “direction of travel”.

Director of energy strategy and government affairs at Siemens Mathew Knight said the sector needed “….a rolling forward view, published every year by Decc, endorsed by the Treasury and by the National Infrastructure Commission, and embraced by the whole industry… Nobody is after certainty, but just clarity of direction allows investment.”

Investors appealed for a decision to be made on the future of the levy control framework (LCF) beyond 2020, saying it provided a useful tool for seeing how much government money might be available for renewables.

Principal at the Townend Group Morgan Angus said the government should also give more details on how the LCF budget is calculated “so that when something happens in the market people can understand how that is likely to feed through, and start pricing that in way, way, way before any sort of government announcement is made.”

4. Don’t play party politics – The use of energy policy as a political football and the lack of a consensus between parties was identified by investors as the root cause of many other concerns. They said party politics was hindering long term planning and leading to large swings in policy whenever a new government came to power.

Knight told the committee it didn’t matter if one government pledged to support a particular set of technologies as the next government could “come along in the future and say, with equal lack of justification, exactly the opposite”.

He highlighted Europe as a counter example:  “They are a lot more consensual and technocratic in the way they view energy policy. Here in the UK, for some reason, it is a much more partisan thing and it has become a much more adversarial thing over the years.”

Knight also begged politicians to hold their tongues more often: “We need to be careful about the way we express political opinions around energy, particularly in ignorance. … In the past we have seen 1,000 jobs killed in the UK as a result of a speech.”

5. Don’t cut and run – With the renewables obligation for onshore wind set to end in April this year and energy secretary Amber Rudd saying it isn’t likely to be eligible for contracts for difference in the future, investors appealed to the government to provide the technology with some kind of support.

One suggestion was ‘subsidy free’ contracts for difference (CfDs). Chris Hulatt of Octopus Investments said: “I think the onshore wind sector is looking to see what Decc is going to do in terms of the market stabilising CfD and whether that comes forward as a viable mechanism to provide support.”

Concerns have also been raised about what will happen with CCS following the axing of the competition last year. The CCSA’s Luke Warren said the creation of a national strategy for CCS, involving various government bodies and stakeholders, was critical if Britain was to “keep remaining projects and investors interested in the UK as a potential market for CCS”.

Despite saying the government still held the view that CCS had “a potentially important role in the long-term decarbonisation of the UK’s power and industrial sectors”, energy minister Andrea Leadsom recently told a session of the energy bill committee a national strategy was “unnecessary”.