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UK energy took another step towards becoming uninvestable this week with the government’s surprise decision to drop one of Drax’s two biomass units off the list for an early support contract (see p15). It was such an unexpected blow that Drax is considering legal action against the government. In one day, the decision wiped 13.5 per cent – £400 million – off the company’s valuation.
Investment in a country’s infrastructure is effectively a deal; an agreement between the government and the money men that cash will be provided on the one hand for a secure and stable long-term return on the other. It is unusual in being an unspoken tripartite agreement: the investors put their money into a private company, but it is dependent upon certain guarantees and behaviours from the public sector. That takes trust. With Drax, the poster-boy for Electricity Market Reform (EMR), considering legal action against the government, that trust is in tatters.
The impact of this will play out far beyond the life of this government (perhaps that’s why it seems blind to it). EMR was intended to provide the certainty and security required to bring forward investment in renewables and enable the transition to a low-carbon economy. Thanks to the changing public agenda, the rising importance of affordability, and a fair degree of political obfuscation and cack-handedness, the reform is beginning to look unfit for purpose before it’s even been implemented. Couple this with the impending Competition and Markets Authority (CMA) inquiry (see our interview with Martin Cave, p8), and you have to ask: who would invest in UK energy? Would you?
Rather than fleets of new windfarms and biomass generators, the answer – for now at least – is likely to lie in the rather more pedestrian refurbishment and de-mothballing of power stations such as Dungeness, which reporter Mathew Beech visited this week (see p22). They can be kept going for another ten years or so, which should get us through the mid-decade capacity crunch, though possibly at the cost of our 2020 carbon targets. With investment effectively on hold and energy policy a political football for the forthcoming election, beyond that is anybody’s guess.
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