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Policy inconsistency and populism pose a bigger threat to UK energy investment than the looming competition review, according to a note from Investec.
A government carbon tax freeze and U-turn on support for the conversion of Drax coal plant to run on biomass are signs of a “deteriorating” policy environment, warned analyst Harold Hutchinson. That kind of uncertainty leads to equity investors “running for the emergency exit”.
Meanwhile, energy populism ahead of next year’s election “reveals structural fault lines in UK energy policy”.
A likely energy market investigation by the Competition and Markets Authority (CMA) presents an opportunity to restore investor trust, said Hutchinson. That is despite it raising the risk major energy companies could be broken up.
The UK has not decided whether to follow Germany’s Energiewende model, which champions community energy, or France’s vertically integrated structure, he added. “It is more important than ever to let the marketplace decide, rather than for politicians to champion their half-baked ideas. The biggest favour the CMA can do the UK is to foster a competitive environment.”
Investec downgraded Centrica, which is losing three of its top executives in the coming year, to “sell”. It retained a positive view of SSE and Drax, which have a “clearer overall strategy” and should benefit from the tightening UK electricity market.
German-based utilities Eon and RWE are expecting hard times up to 2016, as they recover from Energiewende. Hutchinson commended the companies on “relatively clear and ruthless strategies to weather the storm” but was pessimistic on the chances of recovery post-2016.
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